James Bullard, president of the St. Louis Federal Reserve Bank, said Monday that cryptocurrencies "are creating drift toward a non-uniform currency in the U.S."
Bullard spoke on the history and economics of private currencies at CoinDesk's Consensus 2018 conference in New York, drawing on his work in this area. He told attendees that public and private currencies can "coexist in equilibrium" and even "facilitate transactions that might not otherwise occur."
But U.S. history shows that currency competition often causes more problems than it solves, he contended. In the 1830s, 90 percent of the currency in circulation was privately issued, with the uniform "greenback" only coming into use during the Civil War.
"You would have Bank of America banknotes, Wells Fargo banknotes," Bullard said, but "they all traded at a discount."
With over 1,800 cryptocurrencies having been issued as of today, Bullard said there was a risk of drifting back towards that kind of "chaos of exchange rates." Consumers could find themselves having to hold multiple forms of currencies for different transactions, he said, with each trading at a different relative price – not to mention the risk that a currency tanks, taking the consumer's savings with it.
"Currencies have to be reliable and hold their value," Bullard said, using the hyperinflationary Venezuelan bolivar as an example.
As for whether cryptocurrencies "might be able to protect us from the vagaries of Venezuelan monetary policy," Bullard pointed to a few issues.
First, transactions using these currencies might be illegal. Ignoring that, though cryptocurrencies' monetary frameworks may not be as reliable as some proponents claim.
Bitcoin, for example, has a fixed supply of 21 million bitcoin, but "the system can still bifurcate, creating two fixed volumes of coins." In Bullard's opinion, problems with monetary policy are "not mitigated by commodity-based money nor by cryptocurrencies."
Following Bullard's opening remarks, he was joined by Diane Brady, journalist and founder of dbOmnimedia, for a fireside chat. She asked if government control was the only way to guarantee a stable monetary system. Bullard replied:
"This century, the past century it's been true. Will it always be that way? I don't know. Maybe there are technological solutions."
For the time being, he said, cryptocurrencies aren't a threat to the dollar's dominance because of their low transaction volumes. "The dollar's in great shape today," he said. "It will stay in great shape."
In the long term, however, the rise of cryptocurrencies could usher in something that looks like today's global monetary system. There's no single world currency, Bullard said, and exchange rates even among major currencies can be volatile.
"The drift to a non-uniform currency could become a serious issue for the U.S. if cryptocurrency reaches a large volume of trade."
Image by CoinDesk