The Federal Reserve Bank of New York published an interview on its website in which two economists from the NY FED Research and Statistics Group, Michael Lee and Antoine Martin, answered questions about the basic concepts of cryptocurrency and financial trust. They first explained what cryptocurrencies were and their trustless nature. Antoine Martin said: “ Cryptocurrencies are digital, or virtual, money. Bitcoin, which was created in 2009, is the first and probably the best known cryptocurrency, but many others have followed, such as Ethereum, Ripple, Bitcoin Cash, Litecoin, etc.” At the same time, the economists expressed their doubt that the cryptocurrencies could ever compete with traditional payment methods.
When it comes to the fact the cryptocurrencies are not backed up by anything real, such as gold, Lee said: “You are right that the virtual currencies are not backed up by physical goods, but neither is the dollar or most other modern currencies. Like any functioning form of currency, cryptocurrencies facilitate payments between parties and provide a store of value. What’s special about them is that they can serve those roles even in environments where trust—or lack of trust—is a problem. Trust is implicit for practically any means of payment. Say I need to buy groceries. If I pay with a personal check, the grocer has to trust that the check isn’t “hot” (that I own the account and it has sufficient funds).”
He added that trust in a particular currency is what gives it value and makes it acceptable in a payment environment. In the case of the cryptocurrencies, the aforementioned trust is not guaranteed by a government or any other institution, it is only guaranteed by the blockchain technology behind them.
When asked if the cryptocurrencies would ever become the money of the future, Martin expressed his doubt: “Cryptocurrencies arguably solve the problem of making payments in a trustless environment, but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies.”
Martin also pointed out the lack of convenience and the extreme volatile nature of the cryptocurrencies as a factor that will prevent them from being adopted as currencies. He also added that people have a tendency to trust the financial institutions to process their payments and the central bank to maintain the value of money.
As Lee said in the interview, there is an inverse relationship between trust in the fiat financial system and interest in bitcoin. During the financial crisis in 2015 in Greece, the number of bitcoin transactions in the network reached its historical maximum.
The interview concludes with a disclaimer that the opinions of the two economists do not necessarily reflect the official position of the Federal Reserve Bank of New York or the Federal Reserve System of the United States of America as a whole.