Potential Trump Nominee Powell is Cautious about Bitcoin
President Trump is widely expected to nominate Federal Reserve Board of Governors member, Jerome H. Powell, for Senate confirmation as the next chair of the Federal Reserve. The potential Fed chair has previously stated what he sees as a tension with bitcoin as the Fed “could face difficult trade-offs between strengthening security and enabling illegal activity.”
Mr. Powell has held a Fed governor’s seat since 2012, and is currently at the relative beginning of a term that would have kept him installed until 2028.
Governor Powell appears familiar with bitcoin as a currency and Bitcoin as a network.
This spring, he gave a talk titled Innovation, Technology, and the Payments System for the Yale Law School Center for the Study of Corporate Law, during nearly half of which he spent discussing “distributed ledger technologies” (DLT) and “digital currencies.”
“Bitcoin helped bring [DLT] to public attention,” the governor began. “Using blockchain technology – which employs a form of DLT – and an open architecture, Bitcoin allows for the transfer of value (bitcoins) between participants connected to its ecosystem without reliance on banks or other trusted intermediaries,” he outlined.
Is the Fed and its Banking System Obsolete?
Mr. Powell continued, “This feature has led some to predict that DLT will, in the long run, render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary.”
After detailing a few of last year’s institutional experiments with bitcoin, his remarks then turned to lessons taught by the world’s most popular cryptocurrency.
“First, in contrast to Bitcoin’s open architecture, work by the financial industry has focused on the development of ‘permissioned’ systems, which establish criteria to determine who is permitted access to particular systems, ledgers, functions, or information,” he noticed.
“Some argue that in certain markets, faster and more predictable processing will also reduce the capital and liquidity costs of operations,” the governor said. However, “technical issues remain,” such as “reliability, scalability, and security remain very important. Beyond these issues, standardization and interoperability across different versions of DLT will need to be addressed to allow technology integration and avoid market fragmentation,” Mr. Powell explained.
Appealing to his law school audience, he stressed the “need [for] a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations [emphasis added].”
Lastly, Governor Powell discussed a possible future state-backed digital currency.
“Advanced cryptography could reduce vulnerability to cyber attacks,” he insisted, “but make it easier to hide illegal activity. To the extent we relax strong cryptography to make it easier for authorities to monitor illegal activity, we could simultaneously weaken security.”
The governor wasn’t all negative, concluding that we “live in a time of extraordinary technological change. We should be open to the new ideas and innovations that will drive economic growth and improvements in our financial system,” he said.
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Images courtesy of Pixabay, The Bipartisan Policy Center, Cspan.
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