Unstable exchange rates pose a major problem for the cryptocurrency market, serving as the biggest obstacle for wider acceptance of the virtual units, according to James Bullard, president of the Federal Reserve Bank of St. Louis.
“The exchange rate problem is a big deal, because you don’t know how they’re going to trade against each other,” Bullard told CNBC on Monday. “That happens even with big-time currencies like the yen and the dollar.”
Speaking from the sidelines of Coindesk Consensus 2018 conference in New York, Bullard said he believes the key for bitcoin and others in the cryptocurrency space will be keeping investor confidence about maintaining value.
While some optimists believe digital currencies that run on blockchain technology have the power to replace fiat currencies entirely, the price volatility will drive away consumers and businesses, according to Bullard, CNBC reports.
“You’ve got this kind of special problem of who’s going to issue the currency and what are those promises about future issuance and can you really maintain the credibility of those promises,” Bullard earlier told audience members at the conference.
“If you can’t, the value of your currency is going to zero the same way the Venezuelan bolivar has.”
Speaking at the blockchain tech conference, Bullard said cryptocurrencies “are creating a drift toward a non-uniform currency in the US, a state of affairs that has existed historically but was disliked and eventually replaced.”
“The drift to a non-uniform currency could become a serious issue for the US if cryptocurrency reaches a large volume of trade,” he said.
“You could imagine going into a story and now you have 10 different ways or 100 different ways that you can pay. That is exactly what people have not liked historically. … They want a uniform thing — a dollar is a dollar.”
It is a reason why he is far less enthused by the concept of cryptocurrencies.
“Currencies have to be reliable and hold their value. This is probably why government backing has been important historically, combined with a stable monetary policy that promotes stability of the currency.”
While he is “a fan of technological innovation as a driver of economic growth, and blockchain and related technologies are promising”, Bullard said cryptocurrencies “may unwittingly be pushing in the wrong direction in trying to solve an important social problem, which is how best to facilitate market-based exchange.”
He also doubts at this point the Fed will introduce its own digital currency, as some have suggested, as he expressed confidence that the dollar is not threatened by cryptocurrencies.
Bullard is a non-voting member of the monetary policy-setting Federal Open Market Committee.
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