Chairman of the Federal Reserve, Jerome Powell, on Monday reaffirmed his belief that the world’s oldest cryptocurrency is a gold substitute but it is too volatile and is “backed by nothing” for it to replace the U.S. dollar. And it won’t essentially replace a digital dollar.
Bitcoin Has No Chance Of Dethroning The Dollar
Speaking during a virtual panel discussion hosted by the Bank for International Settlements (BIS) on Monday, Powell touched on various topics, including the rise of bitcoin, the digital dollar, and stablecoins.
Regarding bitcoin, the Fed chair observed that it is a “speculative asset”, explaining:
“Crypto-assets—see Bitcoin—are highly volatile and therefore, not useful as a store of value. They are not backed by anything, they’re more of an asset for speculation.”
Powell then went on to draw comparisons between bitcoin and gold, suggesting that the crypto could be considered a replacement for the precious metal. Notably, this is an opinion shared by most observers who tout the flagship crypto as “digital gold”. Gold has long been viewed as an effective store of value against uncertainties. Its value surges against inflation and it actually moves independently of other asset classes. With bitcoin, some experts claim that it is even better at being gold than gold.
It’s worth noting that this is not the first time the Federal Reserve chair has compared bitcoin to gold. During an interview in July 2019, Powell referred to bitcoin as a “speculative store of value, like gold”. On March 22, however, he insisted that bitcoin has zero chance of replacing the U.S. dollar due to its high volatility, lack of backing, and energy requirements for mining.
“I think with crypto assets, the public needs to understand the risks. There’s the volatility, there’s also the energy requirements for mining and the fact that they’re not backed by anything. They’re more of an asset for speculation, so they’re not particularly in use as a means of payment. It’s more a speculative asset. It’s essentially a substitute for gold rather than for the dollar.”
He added that private cryptocurrencies like bitcoin have attempted to complement fiat currency but they have not succeeded so far.
After quiet trading on Monday, bitcoin fell below $55,000 following Fed Chair Powell’s comments which sparked a bearish market sentiment. The top crypto has been stuck in a narrow trading range, with neither the bulls nor the bears willing to take the lead.
“Stablecoins Are An Improvement Over Crypto Assets”
On stablecoins, Jerome Powell posited that they are an improvement to cryptocurrencies because of their fiat backing:
“To the extent a stablecoin is backed by sovereign currencies of leading nations, that’s certainly an improvement over crypto assets, I would say. But nonetheless, where’s the credibility come from? It comes from that sovereign currency that is the backstop.”
The banking industry has responded to stablecoins with central bank digital currencies (CBDCs). Although most CBDCs lie atop the blockchain, they are quite different from the decentralized stablecoins. For instance, CBDCs will be issued and monitored by the respective central banks.
Most nations across the globe are rushing to develop their own CBDCs to be on the safe side in a scenario where cryptocurrencies or stablecoins gain a lot of traction. However, the Fed chair emphasized that they are in no rush to develop the digital dollar and won’t fall into the trap of trying to be first. In other words, the Federal Reserve is determined to do it right — which could take some time — even if it means losing first-mover advantage.