Among the world’s major central banks, one of the most critical and sceptical of digital currencies and Bitcoin is surely the US Federal Reserve (FED), which is the only one among the world’s major banks that does not yet believe it is worth the effort to even begin a study on the possibilities of adopting a Central Bank Digital Currency (CBDC).
Institutional finance divided on the usefulness of cryptocurrencies
In July the bank said that the existence of CBDCs would probably make Bitcoin and other cryptocurrencies absolutely useless. And it is no coincidence that a few days ago the President of the Bank for International Settlements, Benoit Coeure, reiterated the need for state-owned digital currencies.
President Jerome Powell recently reiterated that he considered cryptocurrencies to be highly speculative and unreliable assets, and therefore totally unsuitable to replace traditional currencies.
In August, Powell also stated that he thought cryptocurrencies should be better regulated. On this point, the SEC certainly seems to have got the message, since in recent months the American stock exchange authority has opened dozens of investigations into American cryptocurrency companies for alleged violations of financial rules.
The Federal Reserve is also very concerned about the spread of stablecoins, which, unlike normal cryptocurrencies, are pegged to a fiat currency, such as the dollar.
And this, according to many observers, scares central banks like the Fed, because they could actually be an alternative to fiat currencies, being much less speculative than normal cryptocurrencies.
Cryptocurrencies are beyond the control of central banks
Another aspect that frightens the Fed to some extent is that Bitcoin was born after the great financial crisis of 2008, to equip the world with a payment system that would escape all the manipulation generated by central authorities, which according to those who invented Bitcoin, was one of the real causes of the great subprime mortgage crisis.
The role of the major central banks is precisely to control inflation and contain its rise, with an appropriate interest rate policy, or through expansive policies of buying securities to finance the economic system, as happened in 2008 and as is happening now after the great economic crisis caused by the pandemic.
Now, according to many observers, it is precisely the Fed that could tighten this expansionary policy to curb the first signs of rising inflation.
It is no coincidence that Bitcoin is seen as a weapon to fight inflation and is therefore widely used in underdeveloped states, which have a hyperinflation problem.
How the FED’s moves affect Bitcoin
According to some economists, the spread of cryptocurrencies could reduce the effects of the monetary policy of the FED and other central banks, because it would reduce the demand for fiat currencies.
Bitcoin and cryptocurrencies, as mentioned above, would therefore reduce the risk of inflation, which central banks must control by reducing or raising interest rates as needed.
It is now a fairly clear fact that the prices of the dollar and Bitcoin are now indirectly correlated, and very often a rise in one corresponds to a fall in the other.
In the same way, therefore, a rise in US rates by the Fed often corresponds to a fall in Bitcoin prices, due to the migration of investments towards dollar assets and a consequent lower exposure to other more speculative assets, such as Bitcoin and cryptocurrencies in general.
For stock indices, the correlation seems less direct, but in the last period a synergistic trend seems to prevail especially between Bitcoin and Dow Jones, the main American stock index. When one goes up, the other often goes up and vice versa.
The post The dangerous relationship between Bitcoin and the Federal Reserve appeared first on The Cryptonomist.
