Fed Chair Ponders Potential for Digital Dollar to Send Bitcoin to Zero

By André Beganski

U.S. Congressman Stephen Lynch (D-MA) expressed concern Wednesday over the possible impact of a central bank digital currency (CBDC), asking Federal Reserve Chairman Jerome Powell to ponder the potential for a tokenized version of the U.S. dollar to wipe out other digital assets.

Lynch's comments came as Powell testified before the House Financial Services Committee, fielding a series of questions about digital assets.

“I'm worried about a lot of these stablecoins and other cryptocurrencies,” Lynch said. “Do they go to zero when we come up with a CBDC that has the full faith and credit of the United States behind it?”

The Fed has explored the concept of issuing a digital dollar for years, publishing research as far back as 2016. CBDCs are similar to digital tokens in use today like stablecoins—which track the price of a fiat currency—but are managed by their respective governments instead of being issued by private firms on decentralized networks.

Powell indicated it’s unclear to him why any cryptocurrency that isn’t “drawing on the credibility of the dollar” like Bitcoin or Ethereum has any value at all, regardless of a CBDC’s release. He refrained from commenting on how they could possibly be impacted by a CBDC as a result.

“I’ve never understood the valuation of those,” Powell said regarding coins that “​​don't have any intrinsic value, but nonetheless, trade for a positive number.”

He also suggested it’s hard to judge how stablecoins would be impacted, citing a lack of regulation in the U.S. that renders the reserves of some stablecoins opaque.

Stablecoins like Tether have faced penalties in the past for making false statements about their token’s backing. And last month, Paxos said it was preparing for a potential lawsuit from the Securities and Exchange Commission over its Binance-branded stablecoin BUSD.

Legislation that would provide a regulatory framework for stablecoins has been introduced on Capitol Hill several times, yet each bill so far has failed to gain momentum. Last summer's collapse of Terra’s UST, a so-called algorithmic stablecoin that maintained its value via code instead of being backed by assets, created renewed urgency among lawmakers to establish rules of the road.

Eleven countries have already launched a CBDC and nearly 90 countries are either piloting, developing, or researching a CBDC, according to the Atlantic Council’s CBDC tracker. Lynch asked Powell for an update on the Fed’s timeline for potentially releasing one too.

“I can’t give you a date,” Powell responded. “We engage with the public on an ongoing basis. We’re also doing research on policy and also on technology.”

Powell said that the Fed hasn’t yet determined whether a CBDC is an innovation that’s even needed in the U.S., adding the central bank is not at the “stage of making any real decisions.”

He described the development of a CBDC as being in an early, experimental phase, adding the technology will take years to evaluate. However, Powell indicated that a CBDC could be rapidly rolled out to the public if it’s decided upon by Congress, saying  “I think we can get this into the hands of the public very quickly.”

New York’s Federal Reserve bank has previously engaged in an experiment that simulated how a tokenized dollar could work among financial institutions, launching a pilot program last November that included firms like BNY Mellon and Citi.

Other lawmakers, including French Hill (R-AR), asked Powell questions related to CBDCs, such as whether the Fed chairman still holds the belief that a CBDC would need authorization from Congress.      

Powell responded that the U.S. central bank might not need written approval from Congress to establish a CBDC, at least for financial institutions, explaining a “wholesale” CBDC could be a valid for settling transfers between banks and other financial institutions.

Powell had previously said that establishing a tokenized version of the U.S. dollar would need written approval from Congress, but he clarified in testimony before the House Financial Services Committee that the need applies to a CBDC for “retail” consumers.

“We've always been talking about [a] retail CBDC, and that's something we would certainly need congressional approval for,” Powell said. “There are potential forms of a wholesale CBDC that we’d need to look at. It's less clear.”

Powell added that it’s also a valid question to ask why a wholesale CBDC would be needed, alluding to the upcoming launch of FedNow, an instant payment service for Federal Reserve Banks that is set to launch later this year.

Some Republican lawmakers like Tom Emmer have pushed for legislation that would ban the Fed from releasing a CBDC, saying it would erode Americans’ right to financial privacy. He reintroduced the legislation shortly after the Federal Reserve Bank of San Francisco started accepting job applications for CBDC developers and designers.

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