On May 9, the board of directors at the Federal Reserve heldits quarterly meeting with the Federal Advisory Council to discuss pressingmatters within the Fed’s jurisdiction.
Among the issues discussed was Bitcoin, and from the minutes of that meeting, it sounds as thoughsome relatively progressive ideas about crypto-currencies are taking hold inthe Fed.
In fact, the minutes even note that Bitcoin could be “a boon”to the economy.
These sentiments, however, are not novel, even in Washington.The Bitcoin Senate hearings last November touched on the currency’s importanceas a financial innovation, as well.
What is particularly novel in this document is the apparentlack of hand-wringing over Bitcoin’s potential to facilitate crime. Here iswhat the minutes say about Bitcoin’s use in “illicit” economic activity:
Illicit applications arerampant but not endemic to Bitcoin; sovereign-issued currencies and otherprecious goods are similarly used.
Sizing estimates for theworld’s black markets reach into the trillions of dollars. At this stage, thetotal value of Bitcoin is approximately $6 billion, a sum that is dwarfed byother forms of payment, whether illicit or not.
The FAC acknowledges that Bitcoin is just like cash or gold inits ability to fund criminal activity.
Contrast that to comments made in November by Mythili Raman,acting assistant attorney general of the DOJ’s criminal division, who wasalluding to Silk Road:
There are many criminalsmigrating to hidden services on the internet, and that has been a challenge forlaw enforcement.
It can be frustrating tothe public to see another website pop up after one that seems similar to itjust having been taken down, but it is incredibly important for us to be takingthose steps.
That’s not quite apples to apples, comparing statements fromthe Fed to statements from the Department of Justice. Each organization has itsown interests, and the DOJ is going to naturally worry more aboutcrime-fighting.
Still, there is enough in these minutes to suggest mainstreamperception of Bitcoin, at least in Washington, has evolved beyond concerns overblack market dealings and price volatility.
The minutes note that the fluctuating price of one bitcoinrelative to the dollar leaves “room to improve”:
Extreme price volatilityis similar to other speculative forms of stored value, undermining Bitcoin’scredibility. This volatility is likely to diminish over time.
The Banking System
The FAC also concludes that Bitcoin “does not present anear-term threat to the banking system by way of disintermediation”:
While it does havepeer-to-peer utility, the network effect has prevented adoption fromaccelerating to the point where Bitcoin supplants traditional payment methods.
Bitcoin transactionscorrespond to only a fraction of today’s global fund flows.
That said, Fed and FAC officials are clearly aware of thebenefits Bitcoin offers and the protocol’s potential, especially in parts ofthe world with difficult to access banking services:
Bitcoin’s longer-termimpact could be more pronounced and require adaptation by payment processors.
- Lower transactionfees, particularly for small transactions, are especially attractive tomerchants.
- While existingpayment networks have a footprint advantage, it is largely confined to thedeveloped world. Bitcoin enables cheap international remittance to thedeveloping world and the developed world’s “unbanked,” expanding financialinclusion.
- Consumers are likelyto use Bitcoin if they perceive its benefits – namely faster settlement andgeographic flexibility – to exceed those of its alternatives.
The minutes do still advise some kind of federal regulation ofBitcoin, though Federal Reserve Chairwoman Janet Yellen has already said regulation will not be herorganization’s responsibility.
The minutes note three areas of concern: customer protection,the abovementioned “illicit use,” and the so-called Balkanization ofinconsistent patchwork rules.
On consumer protection:
Bitcoin’s most obviousconsumer flaw is its susceptibility to theft, which can be addressed in several ways:
- Supervised riskmanagement of Bitcoin exchanges, including requirements for business continuityplanning.
- Regulatoryoversight to ensure that exchanges invest in appropriate cyber and othersecurity measures. This includes fully secure storage of Bitcoin wallets.
- Additionalconsumer protections would be fraud prevention, a forum for transactiondisputes, and disclosure of Bitcoin’s risks and costs.
- On avoiding Balkanization:
Consistency acrossgeographic areas is necessary to preempt regulatory arbitrage, as isconsistency with regulations governing existing payment networks.
Recent guidance fromregulators indicates growing awareness of the need for oversight:
- The InternalRevenue Service has characterized Bitcoin as property rather than currency fortax purposes, effectively making each transaction a taxable event andincreasing recordkeeping requirements.
- The Financial Crimes Enforcement Network(FinCEN) guidance obligates certain Bitcoin participants to register as moneyservice businesses, subjecting them to greater reporting and recordkeepingrequirements.