Vice President of the Federal Reserve Bank of St. Louis David Andolfatto released a report on Bitcoin (PDF) yesterday, and it gave the Bitcoin community another peak into what financial regulators really think about cryptocurrency. The report is 36 pages long, but one of the most interesting slides in the report has to do with Bitcoin’s effect on taxation. It talks about how the recent IRS ruling could limit the bitcoin’s attractiveness as a currency, but the St. Louis Fed also admitted that “enforcing an outright ban is close to impossible.” This is a stark contrast to Senator Joe Manchin’s original contention that Bitcoin should be banned immediately, and it’s obvious that there are some regulators and legislators who understand the technology behind Bitcoin more than others.
Bullish on Bitcoin and Ripple
It wouldn’t be far-fetched to say that the entire report from the St. Louis Fed was actually quite bullish for Bitcoin overall. At one point, the cryptocurrency is referred to as a “threat [to] money and payment systems.” Just below that quote, it is noted that Bitcoin “will force traditional institutions to adapt or die.” Although Ripple is noted as a possible competitor to Bitcoin due to its willingness to work within the current financial system, it seems that the conclusion of this report is the cryptocurrency is here to stay in one form or another. In one of the very last slides, the author of the report talks about an independent Federal Reserve operating alongside something like Ripple as a P2P payment system.
A Tool for Criminals?
One of the main criticisms that has been thrown at Bitcoin from the mainstream media and Congress is that it can be used by criminals to facilitate everything from child pornography distribution to terrorism. The report from the St. Louis Fed also makes this point, but it also admits that the same is true of basically every other currency. The report makes the often-cited comparison between bitcoins and caash on the same slide. At the end of the day, bitcoins are a means of exchange, which means they can be used by both good and bad actors.
A Single Point of Criticism
Although most of the report looked like a pamphlet on why everyone should be excited about Bitcoin, the one point of criticism was the volatility of the currency. Charts comparing bitcoin volatility against the dollar over the past few months were able to illustrate that Bitcoin still has a ways to go before it can takeover the world monetary system. Although bitcoins have been extremely volatile when compared to dollars or euros, it’s interesting to note that the report from the St. Louis Fed claimed that “well-run central banks should welcome the emerging competition.” One has to wonder what this means when it comes to bitcoins competing with the fiat currencies of countries where the central banks are not so conservative.
The Final Conclusion
Andolfatto’s final conclusion in the report is that the US dollar could actually benefit from something like a Ripple-esque payment system. While payments are definitely the main use case in places like the United States, I’m still more interested in bitcoins disrupting fiat currencies in other parts of the world. Yes, the bitcoin is still a rather volatile form of money right now, but we need to see what happens as developing countries are brought into the mix before we completely write-off its potential as a currency. The idea of cryptocurrencies and fiat currencies living side by side is a logical one for now, but we have to think what would happen in a situation where a few countries started to hold bitcoins as reserves instead of dollars, euros, or gold. This was definitely an interesting report from the St. Louis Fed on Bitcoin in the United States, but bitcoins, as a currency, are going to be made or broken in places like Argentina, Venezuela, India, and Kenya.