Digital Currency No Threat to Dollars, Fed’s Harker Says

By Gregory Roberts

Digital currency won’t topple traditional, government-sanctioned money from its central role in the economy in the foreseeable future, Philadelphia Federal Reserve Board President Patrick Harker said in a speech April 3.

The exception would be digital currency issued by a government, Harker said at the School of Engineering and Applied Science at the University of Pennsylvania. But while some governments are looking into that possibility, it faces “technical challenges, the unprecedented risk of cyberattacks, potential for criminal activity like money laundering, and threats to privacy,” Harker said in prepared remarks.

Harker expressed a conservative view of the impact of financial technology.

“Fintech overall is actually just natural market evolution,” he said, “and the assumptions about disruption — or indeed, creative destruction — are, with apologies to Schumpeter, probably out of proportion.”

Economist Joseph Schumpeter (1883-1950) wrote about entrepreneurs and innovation. He popularized the term creative destruction, a description of the continuing revision and replacement of economic systems as they evolve.

Bitcoin No. 1

The best-known and most widely used digital currency is bitcoin. Unlike traditional “fiat” currencies, bitcoin exists only in cyberspace and is not honored by any government nor recognized as a legal payment of debts and obligations. It can be traded for dollars on online exchanges at a fluctuating rate set by an open market, and that rate was close to $1,140 per bitcoin April 3.

“The underpinning of currency, like the financial system itself, is trust,” Harker said in his speech, one in a series at the school on technology, business and government. “A fiat currency like that in the United States, which is issued by a central bank in a secure and stable economy, works because we trust it. A dollar is a dollar. We all agree that it is and there’s not much that can undermine that faith. We experience inflation, sure, but not often in dramatic or abrupt ways.

“On the other hand, one of the things you’ll see with digital currency is how wildly the value swings. The question is will there ever be a digital currency that is stable enough to become as widely used as a government one.

“Research by my staff indicates that privately issued currencies can lead to unstable money supply and depreciation of the currency,” he said. “Why? Because there’s no fundamental guarantee of its value in the same way that there is with currency issued by the central bank of a credible and stable government.”

Fintech may eliminate some types of jobs and provide new ways of doing things, but it won’t bring about the demise of banks, Harker said.

“No matter what happens in the world of fintech, you still need a trusted broker of money,” he said. “The roles may change and adapt, but someone needs to be the source of funds and credit.”

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