With more officials raising eyebrows over digital assets, the Federal Reserve says it is close to weighing in on the role crypto will have on the U.S. money supply.
The Fed will publish a white paper around early September, Fed Chair Jerome Powell said during a monetary policy hearing before the House Committee on Financial Services on July 14. The paper will address cryptocurrency, stablecoins, and the potential introduction of a central bank digital currency, which refers to digital tokens issued by any central bank that represent the nation’s currency.
With the U.S. “really at a critical point” in terms of digital currency, the Fed will lay out the potential benefits and risks of all these issues and initiate a “major public consultation” with the public and Congress, Powell said.
The Fed Chair’s statements come right after the agency published its semiannual Monetary Policy Report to Congress on Friday, in which it singled out the crypto asset price surge for the first time, posing it as a reflection of investors taking on more risk.
Documents show that Powell has recently met with key figures in the digital currency industry. In May, he sat down with Coinbase CEO Brian Armstrong, and the next day had a virtual call with Christopher Giancarlo, director of the Digital Dollar Project, which is piloting the first program in the U.S. to test potential uses for a U.S. central bank digital currency.
“We are working hard on it right now,” Powell said at the July 14 hearing of the Fed’s efforts to publish its impending report on digital payments.
During his testimony, Powell drew attention particularly to stablecoins, which are digital tokens whose value is tied to things like fiat currency or gold in order to stabilize their price. Powell raised doubts over whether cryptocurrencies would become a “significant part of the payment universe,” but specifically noted that stablecoins might be.
“It’s very simple,” Powell said. “These are economic activities that are very close to bank deposits and money-market funds. They need to be regulated in similar ways.”
During questioning, Powell agreed with Ohio Rep. Anthony Gonzalez’s concerns about the stablecoin Tether, which has come under fire owing to its controversial backing.
Last month, disclosures from Tether, a Hong Kong–based company that issues U.S. dollar-backed tokens, revealed a sizable chunk of its reserves are in commercial paper (commercial paper is the short-term debt companies issue to secure cash for expenses like inventories or payroll).
Powell testified that he “absolutely” shared concerns over this, and noted how liquidity for commercial paper has historically become a major concern.
“In both of the last two financial crises—during the acute phase of the crisis—the market just disappeared, and that’s when people will want their money,” Powell said.
Powell said the Fed would be addressing all these issues in its impending white paper. What will ultimately emerge as a result is unclear. Questioning from House representatives suggests not everyone would be thrilled about the central bank toying with the idea of issuing its own tokens.
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