The European Central Bank fears crypto market volatility and excessive bank borrowing
Federal Reserve Chairman Jerome Powell said Wednesday that the U.S. central bank would be willing to participate in any government effort to stockpile large amounts of bitcoin, sending the cryptocurrency down more than 5 percent after his comments and 1.2 percent on Thursday, briefly falling below $100,000.
“We are not allowed to own (bitcoin),” Powell said at a news conference following the Fed’s latest two-day policy meeting, in which policymakers cut interest rates as expected while signaling a less certain path for monetary policy in the coming months, according to Reuters.
Regarding the legal issues surrounding holding bitcoin, Powell said, “That’s the kind of thing that Congress would have to look at, but we’re not looking for a legal change at the Fed.” Powell was talking about the possibility that the central bank might get involved in the idea of the government building a so-called “strategic bitcoin reserve” once President-elect Donald Trump takes office.
Powell’s comments on Wednesday weighed on the value of bitcoin, which has surged, along with other crypto assets, since Trump’s Nov. 5 election victory, on the prospect of a less invasive government approach to an asset class that is rarely used as actual money but mainly as a vehicle for speculation.
Trump has proposed creating a U.S. strategic reserve for bitcoin, a concept that has also been widely rejected in Europe. The incoming president has offered no specifics about what such a reserve might include, other than to say that its initial holdings could include bitcoin confiscated from criminals, a stockpile estimated at 200,000 bitcoins, worth about $21 billion at current prices.
Bitcoin has more than doubled in value this year to over $100,000, driven by optimism over Trump’s pro-crypto stance. However, the asset has proven extremely volatile in its 15 years of existence, which analysts say diminishes its usefulness as a store of value or a medium of exchange, the two main features of a reserve currency.
Republican Senator Cynthia Lummis has introduced a bill to create such a reserve, under which the US Treasury would buy 200,000 bitcoins annually until the stock reaches 1 million tokens, with the purchases being funded from Federal Reserve deposits and gold holdings.
Funding a strategic reserve of bitcoin would likely require congressional approval and the issuance of new Treasury debt, according to an analysis published this week by Barclays. Given the potential ways to create such a reserve, the Barclays analysts said, “We suspect that such a plan would face strong resistance from the Fed.”
More broadly, Fed officials have been skeptical of securities like bitcoin, even backing away from efforts to create a fully digital dollar in favor of letting the private sector innovate on payment technologies. The Fed’s primary role in cryptocurrencies appears to be how these assets affect consumer and banking safety.
“We regulate and supervise banks and we want the interaction between crypto businesses and banks not to threaten the health and well-being of banks,” Powell said on Dec. 4, but he also noted that when it comes to crypto assets, “we don’t regulate them directly.”
The head of the European Central Bank’s supervisory board, Claudia Buch, also highlighted risks in the crypto market on Tuesday, such as “excessive leverage, lack of transparency, and conflicts of interest,” adding that she is closely monitoring banks’ exposure to this type of asset.
Trump plans to appoint former PayPal CEO David Sachs as White House AI and crypto czar, and cryptocurrency advocate Paul Atkins to lead the SEC.
In Europe, a number of central bankers this week rejected any suggestion that bitcoin should be turned into a reserve asset, with Belgian central bank governor Pierre Wunsch saying in an interview on Wednesday that “there is little appetite to hold bitcoin reserves.” Outside the euro zone, Hungary’s central bank governor, Mihaly Varga, said on Monday that cryptocurrencies were too volatile.
“We are following the discussion, especially in the post-election period in the United States, very closely,” ECB policymaker Olli Rehn said Tuesday. “But our view has not changed: crypto assets are assets, but they are not currencies,” the governor of the Finnish central bank added.
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