There will be no Fedcoin. That’s according to Fed chairman Jerome Powell, in testimony given before the House Committee on Financial Services.
“We’re not looking at this at the Fed, that the Fed would do a digital currency,” he said. "That’s not something we’re looking at.”
My own view: this is the right answer. The Fed should focus entirely on the soundness of the dollar and the banking system. Innovations like cryptocurrency and the growing infrastructure associated with it are the business of private enterprise, not government and official institutions.
Apparently, however, the European Parliament has a different idea. This new report “Competition Issues in the Area of Financial Technology” purports to explain how governments in Europe can “anticipate and manage anticompetitive behaviours” within the realm of new financial technology. Among the recommendations: central banks should create their own cryptocurrencies.
I’m not a believer. They won’t compete in the marketplace. They might achieve the opposite of the stated goal.
The End of Monopoly
Truly rivalrous competition is just now starting to exist in a sector long monopolized by governments. More than a century ago, most government in developed economies created central banks to manage an official currency, directing all commercial traffic through its portals as a way of controlling economic life. It was the end of currency competition and independence in the banking industry.
Elites believed they knew best, and were so sure that they drove out all private monies and unofficial banks. The age of controlled money had arrived — and with it, world wars, depression and inflation, enormous government indebtedness, and the rise of leviathan states that learned to print their way to power and riches.
Thanks to decentralized-ledger technology and some impressive innovations to create digital money and banking solutions — the technology operates peer-to-peer and requires neither government nor intermediaries to operate — we are beginning to see what real choice in currency might look like.
The technology has only been around since 2009, but it’s become the most exciting thing in money and finance on the planet.
So there is something strangely Orwellian about a government report kvetching about anticompetitive behavior in the crypto sector. Most critics are complaining about too much choice. The failure rate is just as high as you find in the small-business sector, which indicates a true trial-and-error culture of entrepreneurship.
Intervening will only result in more costly regulation and probably end up setting back the cause of genuine competition.
Most worrisome is an oblique mention of the possibility of central banks’ creating their own cryptocurrencies. What could be the point? Just because something is innovative and fascinating doesn’t mean governments should be involved. It’s hard even to imagine how a government-backed crypto would even work (think of the Petro).
Here is the statement:
The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the inter-cryptocurrency market, broadening the number of competitors. A potential inadequacy of traditional competition policy to address competition issues in the cryptocurrency markets can be found, suggesting direct public participation through a central-bank digital currency as a remedy.
A remedy for what? There are already thousands of cryptoassets circulating on exchanges, and more every day. It’s not at all clear what a centralized crypto would add that private markets are not already providing. If monetary authorities are warming to blockchain technology, I’m all for it. But the right way to do this is merely to acquiesce to the emergence of the innovations all around you.
As the 17th-century French merchant told the king when asked how the crown could help with business: “Laissez faire et laissez passer.”
To be sure, there is plenty that European monetary authorities could do to reform money and bolster competition. There’s never a bad time to deregulation, lower barriers to entry, open opportunities for financial innovation.
As for existing national natimoney, a gold standard would be great. Government wrecked the gold standard; penance for that action is realized through undoing that long process of destruction. Even just a quantity rule and an end to discretion would be an improvement. If you want to dabble in blockchain technology to make that happen, all to the good. But there is no value added in pushing out a government-backed, central bank–branded crypto.
So far, there’s only been talk, no action. The one exception is the Venezuelan petro, which turns out not to be a crypto but rather an oil-backed debt instrument floated only to get around U.S. trade sanctions.
In any case, a central bank–created crypto would not be a genuine crypto, which obtains its value by virtue of the mind of the market, not by some official imposition. There is also the strange problem of geography here. Crypto lives on a global scale, mined anywhere, sent from anywhere, received by anyone anywhere.
How in the world can the old-world idea of a currency zone fit with modern crypto monetary systems? The report comes close to admitting that it cannot:
The international nature of cryptocurrency markets is also a challenge to competition policy at the European level. Many of the players operate from global locations outside the jurisdiction of European competition authorities, which makes investigation or prosecution on anticompetitive behaviours more difficult. Europe leads, at international level, the supply of wallet and exchange services, with 42 % and 37 % in terms of number of players. It is also the principal actor in payments (33 %). Nevertheless, the main weakness of Europe is the concentration of the mining activity on non-European countries (Europe only capture just 13 % of the current mining market).
How long has it been since government and official institutions like central banks had the technological lead? These institutions had nothing to do with creating internet commerce, the app economy, the mass availability of email and messaging platforms, or the peer-to-peer gig economy. All the innovation in my lifetime, and probably since the moon landings of old, has come from the private sector.
The advent of Bitcoin, blockchain, and crypto is an especially impressive case, a pure revolution from below. The inventor remains pseudonymous. The technology was released into the commons on an email list. It started from nothing to become the world’s first successful experiment in universal digital money that operates without intermediation.
When the private sector is innovating, government and central banks should leave them alone.
And an even better rule: if you didn’t invent it, and you made no contribution to making it more valuable, you can’t regulate it either.