Regulation

Fed governor Waller says crypto ecosystem has distinct parts with varying potential

The parts that make up the cryptocurrency ecosystem are not all equal, United States Federal Reserve Board governor Christopher Waller told a conference audience on Feb. 10. He had clear preferences among the three elements of the ecosystem that he identified.

Waller was hosted by the Global Interdependence Center at its “Digital Money, Decentralized Finance, and the Puzzle of Crypto” conference. He considered crypto assets, blockchain technology and trading technology, such as smart contracts and tokenization, separately.

Waller focused on the broader applications of crypto technology. Research on applications of distributed ledger technology to “a wide range of data management problems” is underway. Smart contracts can be applied to non-crypto assets, and tokenization, combined with data vaults, can protect privacy without promoting money laundering. Further, Waller said:

“While these technological developments are still in their infancy, they have potential applications beyond the crypto ecosystem that could lead to substantial productivity enhancements in other industries.”

The bulk of Waller’s talk was devoted to crypto assets. He compares crypto assets, which he said have no intrinsic value, to a commodity – corn – and used economic theory to explain that intrinsically valueless objects may be traded at a positive price due to the “the social contrivance of money.” But there is an inherent problem, he added:

“What if one day, beliefs change and I no longer believe that someone will pay me for this object in the future? Then I clearly shouldn’t pay anything for it today, so its price goes to zero. […] However, if you buy crypto-assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses.”

Even sophisticated, institutional investors have lost money in the crypto winter, Waller noted.

Related: US federal agencies release joint statement on crypto asset risks and safe practices

A clear idea of the differences between the parts of the crypto ecosystem will help ensure that regulation will mitigate the risks of crypto assets without impeding innovation of “the positive features of the crypto ecosystem,” he concluded.

Waller has previously expressed his cynicism about a U.S. central bank digital currency.

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