The "What's New With..." posts are usually focused on one of the NGPF curriculum unit categories. This one steps outside a bit to hit a topic that is likely of interest to students.  For more background on BitCoin, take an hour to work through the NGPF on-demand PD The Basics of Bitcoin.

Headlines

• El Salvador is making bitcoin legal tender. Some think it is a hoax. President Bukele claims it will increase the proceeds from foreign remittances which currently account for 20% of the nation’s GDP by removing the middleman. From a practical standpoint, any vendor could have chosen to accept bitcoin before, but once it is legal tender, they will be forced to accept it, and may not be set up to do so. And then there is concern about the impact of bit-coin mining on the environment. The president thinks they can use geothermal energy from volcanoes, so no problem. (Washington Post – subscription may be required.)

• During May and June provinces across China instructed municipal governments and power authorities to shut down bitcoin mining operations. This region accounts for about half of the worldwide mining. Mining machines were being sold like scrap metal, and some miners who could flee, did. (Coindesk) (Reuters)

• AMC movies announced that they will accept bitcoin as payment for movie tickets. And credit card companies are scurrying to make paying with cryptocurrency an option. But buyer beware—whether you buy a movie ticket, a cup of coffee, or a car with cryptocurrency, using a credit card or any other platform, be prepared for a tax bill!!! When you buy something with crypto, it’s value may be higher (or lower) than it was when you acquired it. This triggers a capital gain—a short-term gain if you haven’t held it very long! No one seems to be thinking about that yet. If you thought paying taxes was complicated, using crypto for transactions will make it much more so. (CNBC1 CNBC2)

• This NYT article from August 5 (appeared in the Sunday print edition) gives great insight into Hype coins. These are the sketchiest of all cryptocurrencies. It is easy to buy, and easy to create and sell. All the value is speculative. It seems like a crazy gamble of your hard-earned cash, but millions of people jump into the fray (mostly men in their 30s.)

• First, hackers steal $600 million worth of crypto from Poly Network. Then they return most of it. Now their victim is offering them a job in security. (CNBC1 CNBC2)

Regulation

The CNBC article referenced earlier about the potential tax liability generated every time you make a purchase using crypto tees up this discussion of regulation. It is even part of the infrastructure and budget debate in Congress. In the Senate version of the infrastructure bill is a provision to tighten up collection of taxes on cryptocurrency trades and transactions as a way to help pay for infrastructure. Lobbying against the provision became heated. (WAPO-may require subscription)

For a comprehensive look at the regulatory picture surrounding Crypto, this NPR article is a good place to start. At the moment, the SEC (Securities and Exchange Commission) and the CFTC (Commodities and Futures Trading Commission) share regulatory responsibility for crypto, but are trying to tame this beast with existing rules, which don’t really fit well. Gary Gensler, head of the SEC, recently described the world of Cryptocurrency as the “wild west” in a recent speech and has vowed to tame it. Given the recent spate of companies held hostage by hackers demanding ransoms be paid with Cryptocurrency, he has a point. With his experience in finance and subject matter expertise (he taught about blockchain and crypto at MIT for three years), Gensler is a good man for the job. However, he will need help from Congress to write new rules covering the gaps in jurisdiction. You can hear/watch him on CNBC ‘s Squawk Box as he is questioned about that speech and his vision for how to regulate Cryptocurrency, summarized briefly here:

• Cryptocurrencies are speculative assets and trade on platforms that are not regulated (like stock and bond markets are.)
• SEC has some authority over the tokens themselves, but the platforms that trade and lend these assets do not fall under that same authority.
• Working with Congress to fill in the regulatory gaps.

You can’t protect people from the speculative nature of cryptocurrency, but Gensler wants to try to protect people from fraud and market manipulation.

CBDCs

St. Louis Fed economist, David Andolfatto, answers questions about what a CBDC (Central Bank Digital Currency) might look like and how it might function. It would basically be like a digital version of the dollar bills in your pocket, backed by the US government with a stable value. Theoretically, every person in the U.S. could have an account with the government, potentially at zero cost (to them), from which they could make transactions. This could potentially help the unbanked population who can’t “afford” bank services. It could be set up like any other public service.

St. Louis Fed

Chairman Powell recently announced that the Federal Reserve Bank will publish a paper discussing the pros and cons of a CBDC. If you have some time, it is worth reading the speeches given recently by two of the Federal Reserve Governors on the subject of CBDCs. They have quite different views on the subject, but both speeches contain important background information on key elements of banking systems.

Lael Brainard gave a speech at the Consensus by Coindesk Conference. This excerpt is from her introduction.

The pandemic accelerated the migration to contactless transactions and highlighted the importance of access to safe, timely, and low-cost payments for all. With technology platforms introducing digital private money into the U.S. payments system, and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in cross-border payments, the Federal Reserve is stepping up its research and public engagement on CBDCs. 

Brainard puts forth a few arguments in support of the Fed’s pursing further research on CBDCs. The first ties into the technological development of “stablecoin,” a digital asset whose value is tied to a more traditional asset. This could be the basis of a private currency too. It would not be without risk, as it would not be legal tender. But the rise of multiple private currencies would be inefficient (think 19^th century US with competing bank notes.) So perhaps a CBDC would be more efficient (and would be legal tender) and would reduce the attractiveness of others.

Her second argument centers on the accelerated use of digital payments we have seen during the pandemic, and the rescue measures taken to help Americans through the crisis. These brought to light the inequities of the current banking system. For those who file taxes or otherwise have correct banking information on file with the IRS, payments appeared seamlessly in bank accounts. For others, issuing checks and debit cards was delayed. Consider how this could have been different if everyone had a Federal digital account.

Finally, foreign countries are entering the CBDC arena, for example, China. To the extent that more countries participate, Brainard feels the US should have a seat at the table where cross border payment rules are established.

Chris Waller’s speech on CBDCs counters several of Brainard’s points. He starts with a key question:

In all the recent exuberance about CBDCs, advocates point to many potential benefits of a Federal Reserve digital currency, but they often fail to ask a simple question: What problem would a CBDC solve? Alternatively, what market failure or inefficiency demands this specific intervention? After careful consideration, I am not convinced as of yet that a CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives.

Waller provides good background information on banking in general. He explains the difference between central bank money (currency and bank’s digital accounts-reserves-held by the Fed) and bank money (checking and savings accounts.) He further explains that the Fed wasn’t created to have accounts for the public. Commercial banks are the middlemen in terms of enabling transactions. The concept of the Fed holding accounts for private citizens raises all kinds of regulatory questions.

Brainard claims a CBDC would make banking accessible and cheaper for those currently unbanked. Would the Fed end up using technology that makes transactions cheaper than they are currently?  According to an FDIC survey in 2019, approximately 5.4% of households are unbanked, and three quarters of those people were not unhappy about that.  Waller wonders if this group of unbanked would be more inclined to have an account at the Fed than at a commercial bank.  While he purports that private markets would be more efficient at managing a digital currency, remember Brainard’s argument against that notion when she refers to the 19^th century banknotes in the US.

Be on the lookout for that Federal Reserve discussion paper!

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.