Tags: federalreserve | economist | bitcoin | virtualcurrency

Bitcoin's Swings Hurt Viability as Currency, Fed Economist Says

Tuesday, 01 Apr 2014 08:38 AM

The value of the digital currency Bitcoin has fluctuated “violently,” making it less useful as a form of payment compared with more stable currencies such as the U.S. dollar, according to a Federal Reserve economist.

“You don’t want that in a monetary instrument,” David Andolfatto, a vice president at the St. Louis Fed, said in a presentation in St. Louis, referring to Bitcoin’s “wild” fluctuations in purchasing power. “A good money should maintain a stable purchasing power over short periods of time.”

Governments across the globe are grappling with how to regulate virtual currencies such as Bitcoin, which doesn’t have a central issuer. Fed Chair Janet Yellen said in congressional testimony last month that the central bank has no authority to regulate Bitcoin.

Still, there could be room for digital currencies to replace traditional payments processors by offering cheaper alternatives to electronically transferring money, Andolfatto said at a forum hosted at the regional Fed bank.

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. The Bitcoin network uses a public ledger to record transactions made under pseudonyms, a technological breakthrough that allows purchases and sales without using a trusted third party, such as Visa Inc. or Western Union Co.

While a growing cadre of retailers are beginning to accept Bitcoin, recent events have underscored concerns about the viability of the currency. The governments of India, China and Russia have sought to ban or limit its use, and the Mt. Gox exchange filed for bankruptcy protection in February.

Fairly Stable

Andolfatto said today the Fed has provided a fairly stable currency for 100 years and “passed the market test.” The value of Bitcoin is prone to swings because a central authority can’t issue more supply in times when demand for money soars, such as in a financial crisis, he said.

Other Fed officials have weighed in recently on the rise of digital currencies.

Kansas City Fed President Esther George said this month the U.S. approach is to “observe and understand how this technology if unfolding,” adding that Bitcoin probably won’t become widely used until it receives backing from an entity to help stabilize its value.

Philadelphia’s Charles Plosser said he’s not worried Bitcoin will replace the U.S. dollar.

“I don’t have the foggiest idea what they are,” he said in response to an audience question after a speech on March 25. “They are clearly a new innovation and we’ll see how it plays out.”

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