On Friday, May 9th, 2014, the Federal Advisory Council and Board of Governors of the Federal Reserve met because of their quarterly meeting in Washington D.C. This meeting was historically held in secrecy until Bloomberg News “won” a Freedom of Information Act request beneath the Freedom of Information Law requiring the Fed to help make the meetings minutes open to the general public.
The Federal Advisory Council (FAC) is “made up of twelve representatives of the banking industry, consults with and advises the Board on all matters within the Board’s jurisdiction…” based on the Federal Reserve in “Concerning the Fed / Federal Advisory Council.”
FederalReserveEducation.org (maintained by the Federal Reserve) breaks out the Structure and Functions of the Federal Reserve within an easily digestible format. It explains that the Federal Advisory Council is among three “statutory advisory councils” and the the Board of Governors (also referred to as the Federal Reserve Board) is in charge of conducting the United States’ monetary policy, and among other functions “… exercises broad supervisory control on the financial services industry, administers certain consumer protection regulations, and oversees the nation’s payments system…“
On February 27th, 2014, it had been widely reported that Janet Yellen, the brand new Federal Reserve Chairwoman, stated the Fed doesn’t have the authority to modify Bitcoin. This is a C-Span online video where Chairwoman Yellen tells Senator Manchin at the Federal Reserve Board’s semiannual report on monetary policy and the U.S. economic outlook for the entire year that “Bitcoin is payment innovation that’s occurring entirely from the banking system…The Federal Reserve simply doesn’t have authority to supervise or regulate Bitcoin in virtually any way…”
Chairwoman Yellen did deflect a few of the discussion by telling Senator Manchin that Congress ought to be asking what the “legal structure” ought to be. Indeed, Congressional Research Service issued an “beneath the radar” report late this past year, “Bitcoin: Questions, Answers, and Analysis of LEGALITIES.” The report specifically stated that Congress is thinking about Bitcoin due to the effect on the power of the “Federal Reserve to meet up its objectives (of stable prices, maximum employment, and financial stability)” and discusses whether “Bitcoins Will Affect the Fed’s Conduct of Monetary Policy.”
Until the Federal Reserve posted May 9th’s Record of Meeting (PDF), the Bitcoin data made by the Fed has been mostly academic in nature with the regional members publishing their very own respective research (see table/timeline). The Federal Reserve Bank of St. Louis has been most aggressive in this regards, posting a minimum of six videos on Bitcoin on Youtube.
All of the Fed research up to now has contained disclaimers such as for example “The views and opinions expressed listed below are my own , nor necessarily reflect those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System,” as mentioned in David Andolfatto’s (Vice President of Federal Reserve Bank of St. Louis) March 31st Dialog with the Fed: Possibilities and Pitfalls of Virtual Currencies.
The May 9th Record of Meeting (PDF) is really a national (instead of regional) element of the Federal Reserve System. The Federal Advisory Council could make recommendations to the Board that steer policy. You can find no disclaimers here, although Council’s influence could be limited. One infamous exemplory case of conflict was in September 1934 once the Council recommended that the Board go back to the gold standard and was told they were attempting to involve themselves with matter that has been “none of these business.”
The Connecticut Day reported on September 29th 1934 that:
“The federal reserve board caustically replying to a demand by the federal advisory council for the go back to the gold standard, a balanced budget, and a finish to monetary experimentation, yesterday told the council that such affairs were none of its business.”
There were seven items in the Record and Bitcoin was item number five and used a lot more than two . 5 pages…or nearly 25% of the report. You can then assume that in regards to a quarter of the meeting was discussion about Bitcoin. Why was a great deal of time discussing Bitcoin as of this meeting, if Bitcoin is beyond your realm of Fed policy? It’s possible that people are experiencing an identical tug of war from 1934 but that is purely conjecture on my part.
Frankly, how could they not discuss Bitcoin? Bitcoin could be the paradigm shift that Federal Reserve Governor Laurence H. Meyer forewarned about in his speech from 2001. Meyer explained what would happen if electronic money were to attain critical mass:
“A decline in the demand for currency… lower[ing] the monetary base and therefore reduc[ing] how big is the Fed’s portfolio of securities. How big is the Fed’s portfolio, in place, determines the seignorage the federal government obtains through the problem of the monetary base. To the extent that the demand for currency declines, the monetary base and therefore the Fed’s portfolio would shrink, and the interest earnings on that portfolio would diminish…. The Treasury would lose seignorage even from the initial dollar of substitution of e-money for currency. If the Fed were to reduce so much seignorage that it might not cover its costs under current arrangements, it could have to search for other arrangements to cover its costs in a manner that supported its independence.”
At the Fed meeting, it had been asked first of all: “Does Bitcoin pose a threat to the bank operating system, economic activity, or financial stability?”
It plays down Meyer’s concerns by stating that:
“Systemically, Bitcoin’s nascency helps it be more curiosity than threat. Its greatest near-term hazards are its avoidance of consumer protection measures and illicit use, both which support increased regulation. Medium- to long-term effects could possibly be more pronounced because the network self-refines and adoption increases…”
I was surprised to learn the Fed’s admission that Bitcoin can be utilized as an instrument for for the unbanked especially after World Bank connected CGAP issued its report dismissing Bitcoin’s utility for financial inclusion:
“Bitcoin enables cheap international remittance to the developing world and the developed world’s ‘unbanked,’ expanding financial inclusion.”
Other favorable and interesting attributes mentioned in the Record include:
- Bitcoin will not present a threat to economic activity by disrupting traditional channels of commerce; rather, it might serve as a boon.
- Illicit applications are rampant however, not endemic to Bitcoin; sovereign-issued currencies along with other precious goods are similarly used.
And the Fed is pro Bitcoin regulation:
“Regulation is advisable; considerations include protecting consumers, addressing illicit use, and avoiding Balkanization.”
In this regards they recommend, “Regulatory oversight to make sure that exchanges spend money on appropriate cyber along with other security measures. This consists of fully secure storage of Bitcoin wallets.”
If (?) the adjective “fully” when it comes to “secure storage of Bitcoin wallets” implies that an exchange must hold the private key of a Bitcoin wallet it generally does not address how this might even be possible with a decentralized exchange. Actually I’m not entirely certain what the Fed actually means by ”fully secure storage of Bitcoin wallets” (a Google search first)? Perhaps they mean secure storage of Bitcoin? If (?) they mean wallets then we circle back again to the theory they would require an exchange hold a user’s private key. Not only semantics?
The Fed’s direct involvement in Bitcoin at an insurance plan level may very well be triggered by 1 of 2 events. The Fed notes that “Should adoption accelerate, banking could participate increasingly in Bitcoin fund flows, especially as multicurrency accounts proliferate and reputational concerns subside.” Moreover Bitcoin could turn into a “systemic contagion of instability.” This might make Bitcoin no more as Chairwoman Yellen put it, “occurring entirely from the bank operating system.”
If Bitcoin were to be regulated by the Federal Reserve we’re able to see an amendment to 12 U.S. Code § 262 if regulators were to clearly define the objective of the Federal Advisory Council as linked to Bitcoin.
Federal Reserve Bitcoin Timeline
October 2013
St. Louis Fed: YOU CAN FIND Two Sides to Every Coin-Even to the Bitcoin, a Virtual Currency: “In this post, we describe the initial top features of the bitcoin and explain how it operates.”
November 12, 2013
Fed Chairman Ben Bernanke: Letter to Congress: ”Bitcoin along with other virtual currencies may hold long-term promise…”
December 2013 (document actually created same day Ben Bernanke’s letter went)
Chicago Fed: Bitcoin A primer: “Bitcoin solves two challenges of digital money- controlling its creation and avoiding its duplication-at once”…and quoting an economist: “…it represents an extraordinary conceptual and technical achievement, which might well be utilized by existing finance institutions (that could issue their very own bitcoins) as well as by governments themselves…”
December 4, 2013
Former Fed Chairman Alan Greenspan “It’s a bubble…You need to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t had the opportunity to accomplish it…”
December 16, 2013
Richmond Fed: New Private Currencies Like Bitcoin Offer Potential – and Puzzles: “…unlike silver and gold, bitcoins haven’t any nonmonetary use”…Quoting an economist “the worthiness of any medium of exchange, and especially fiat money, ultimately depends at the very least partially on faith.”
January 2014
Cleveland Fed: A BIT on Bitcoin: “Bitcoin may be the first digital currency to successfully simulate cash.”
February 27, 2014
Fed Chairwoman Janet Yellen: Monetary Policy Report “The Federal Reserve simply doesn’t have authority to supervise or regulate Bitcoin at all.”
March 31, 2014
St. Louis Fed: Bitcoin and Beyond: THE OPTIONS and Pitfalls of Virtual Currencies:
“A virtual currency with zero intrinsic value no legal backing.”…”Well-run central banks should welcome the emerging competition.”
May 9, 2014
Federal Advisory Council and Board of Governors of the Federal Reserve put Bitcoin on Agenda at quarterly meeting
Addendum
Also See “Currency King Set to fight Bitcoin” a Print Exclusive in Bitcoin Magazine Issue 18 which discusses the Giori Patent Application “System and Way for Providing and Transferring Fungible Electronic Money.”
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