Federal Reserve: Bitcoin could serve as a boon

Considering the libertarian leanings of the crypto-currency community, it isn’t especially surprising that many members aren’t fans of the Federal Reserve.

A cursory search for “Federal Reserve” in the Reddit r/bitcoin subreddit finds posts titled “Bitcoin Will Succeed in Ending the Federal Reserve’s Currency Monopoly” and a number of similar anti-establishment oriented themes. In this context, one might be forgiven for assuming that the Fed held a similar opposition to the crypto-currency community.

Bitcoin “could serve as a boon”
In the quarterly meeting between the Federal Advisory Council and the Federal Reserve Board of Governors held May 9, item five on the discussion agenda was, “Does bitcoin pose a threat to the banking system, economic activity, or financial stability?”

The results should be read as overwhelmingly positive to the bitcoin community. On every point of concern, including banking, economic activity and financial stability, the Fed regarded bitcoin  as a non-threat, and possibly even a positive thing.

In terms of banking, the Fed concluded that the currency does not yet pose a threat to the banking system because of its low level of overall adoption and factors that continue to limit adoption, like security perceptions and price volatility. In the long term, it suggested that bitcoin actually contained a number of positive traits that might appeal to consumers and payment processors.

Regarding economic activity, the Fed found that, “Bitcoin does not present a threat to economic activity by disrupting traditional channels of commerce; rather, it could serve as a boon.”

Perhaps more importantly, the meeting also concluded that, “Illicit applications are rampant but not endemic to bitcoin; sovereign-issued currencies and other precious goods are similarly used.” This is, of course, what white-hat bitcoin enthusiasts have been saying all along, but all but the most hardcore ‘cypher-punks’ should be happy to hear the government acknowledge it.

Finally, the FAC and the Fed Governors found that, while bitcoin’s stability has “room to improve,” it does not yet have the scale to act as a contagion of instability. Interestingly, members present at the meeting speculated about a hypothetical economy dominated by bitcoin. They concluded that the finite total number of 21 million possible bitcoin would prevent traditional monetary policy tools from reducing growth in an excessive expansion or providing support in a downturn.

Regulation “advisable”
The bitcoin community is generally vehemently against regulation. The Fed noted that advocates for the crypto-currency would likely argue that regulation would minimize the decentralized advantages of bitcoin, but that recent events suggested that it would be worth sacrificing some flexibility to address the most obvious problems.

Meeting members suggested supervised risk management of exchanges, including a requirement for business continuity planning. This is likely a nod to Mt. Gox, which recent reports suggest fell apart for a lack of just such planning. The Fed also suggested oversight to ensure that digital wallets are protected by appropriate security measures.

Also suggested were Know Your Customer regulations and suspicious activity reports, which are also applied to virtually every other currency, in an attempt to decrease the number of illicit and money laundering-related transactions.

Finally, the Fed suggested that consistent regulation be put in place to avoid so-called Balkanization of regulation, in which small areas contain vastly different or contradictory rules.

Should the bitcoin community be worried?
In short? Probably not. The frank discussion contained in the Fed document displays a detailed, accurate knowledge of bitcoin that appears to be free of prejudices against the crypto-currency. Some in the bitcoin community will undoubtedly strike back against the proposals for regulation, but nothing proposed seems as though it would have a negative effect on the community. Indeed, a number of proposals could have the result of protecting bitcoin users.

Probably this won’t stop the tide of anti-Fed sentiment in the bitcoin community, and perhaps these crypto-currency users are right to be wary of a perceived competitor. On the other hand, the price of bitcoin on the CoinDesk index rose substantially in the days after the announcement, which may be in part attributable to Fed support. For now, at least, it seems as though the Federal Reserve is attempting to take a benign approach to crypto-currency.

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