Cryptocurrency investors are "unsophisticated" bumpkins who wouldn't know what money was if it hit them on their heads, Federal Reserve Chairman Jerome Powell suggested during a House Financial Services Committee hearing on Wednesday. No need to worry, however, because sophisticated folks like Rep. Brad Sherman (D-Calif.) believe Congress should "have the courage to ban cryptocurrencies" and save us from our misguided "animal spirits."
During Powell's semiannual testimony to Congress, Rep. Patrick McHenry (R-N.C.) turned the conversation to the subject of cryptocurrencies. At first, Powell merely echoed his comments from last November, saying cryptocurrencies are not significant enough to threaten the financial system. But then he took a cheap shot at investors who have backed cryptocurrencies like bitcoin and ethereum.
"Relatively unsophisticated investors see the asset go up in price, and they think, 'This is great; I'll buy this,'" Powell said. "In fact, there is no promise of that."
All investments carry risk, and investors in any currency, stock, or bond should be aware of that. But that doesn't make cryptocurrency investors any less sophisticated, as a group, than other kinds of investors.
That said, it's important to understand the source of Powell's skepticism. He derided cryptocurrency as an "investment with no promise." Later in his testimony he said cryptocurrencies are not really currencies because they don't "have a store of value," have no "intrinsic value," and are not commonly used for payments.
It's clear that Powell, like his predecessor and many of his colleagues, believes bitcoin and its various cousins are built entirely on speculation. Driven by the Keynesian animus toward speculation, they cannot reconcile its potential with its speculative value. While cryptocurrencies lack the widespread use that defines a medium of exchange as money, their investment value encourages their use and brings us closer to a reality where bitcoin is money.
Contrary to what Powell said, cryptocurrencies already constitute a store of value, although generally not a stable one. Two Federal Reserve economists, Michael Lee and Antoine Martin, found that cryptocurrencies "provide a store of value" in "environments where trust is a problem." Lee and Martin also pointed out that Federal Reserve notes, like cryptocurrencies, are not backed by physical commodities and have no intrinsic value.
Powell's other comments about cryptocurrencies further illustrated his misunderstanding of their potential value. He called attention to money laundering through cryptocurrencies. There is no denying that cryptocurrencies such as bitcoin are used for less-than-legal activities, largely by virtue of their anonymity and radical decentralization. But that fact does not disqualify them as serious alternatives to the present monetary system. Nor does it mean that cryptocurrencies should be banned, as Sherman suggested. "Yes, it is true that criminals have used bitcoin," says Norbert Michel, director of the Heritage Foundation's Center for Data Analysis, "but it's also true that criminals have used airplanes, computers and automobiles."
There is an upside to Powell's bearishness. As long as central bankers don't believe cryptocurrencies pose a threat to the monopoly of state-sponsored fiat money, we can expect fairly lax regulation of the industry. Powell made it clear that he has no intention of pursuing jurisdiction over cryptocurrency. It's better to have government officials mocking bitcoin than trying to regulate it out of existence.