Cryptocurrencies Face Rough Day on Capitol Hill

If the Fed were to adopt its own central bank-issued coin, such as the so-called “FedCoin,” the impact on the banking system could be significant, witnesses said.

Eswar Prasad, a Cornell University professor and Brookings Institution senior fellow, stressed the implications on money creation if the Fed were to essentially allow individuals to have central bank accounts denominated in crypto. Doing so, he told the financial services subcommittee, would draw money out of commercial banks, which do the brunt of the lending that keeps money circulating and the economy humming.

Alex J. Pollock, senior fellow at the R Street Institute, cautioned that increasing the Fed’s share of the U.S. banking system’s $12 trillion in deposits would increase its “size, role and power.” To keep the economy moving, the Fed would have to issue loans, which “would unavoidably be highly politicized, and “taxpayers would be on the hook” for any losses. Central bank digital currencies, Pollock said, are “one of the worst financial ideas in recent times.”

Meanwhile, Dr. Norbert Michel of the Heritage Foundation argued before the financial services subcommittee the government should not “tilt the playing field” and should treat all forms of currency equally.

Implicit in that, Michel said, is removing capital gains taxes from purchases with any form of alternative currency, including crypto and foreign currencies. The U.S. Postal Service and other government agencies also should accept crypto and other forms of currency, he added.

“These competitive forces are the forces that push entrepreneurs to innovate…. they also expose weaknesses and inefficiencies,” Michel said. “The same competitive forces should be used to improve money.”

The Future of Money

Regardless of the pros and cons, a Fed-issued crypto doesn’t appear to be on the short-term agenda, at least based on Powell’s remarks in his semi-annual appearance before the Financial Services committee.

“We’re not looking at this as something that we should be doing,” he said.

Finance services subcommittee hearing speakers also argued that cash — and the dollar, specifically — will remain king for the foreseeable future. Despite declines elsewhere, cash remains the most frequently used form of payment in the U.S., Michel said. Others argued that the dollar’s role as a global reserve would likely continue because of the U.S. economy’s overall strength and stability.

When might cryptocurrencies challenge that role? Garratt said that would depend, in part, on whether central banks get into the digital currency game. Pollock argued that it would only happen after people stop asking, “What’s the price of bitcoin?” and start asking, “What’s the price of that in bitcoin?”