Lee added that trust in a given currency is what gives it value in a payment environment and makes it an “acceptable medium of exchange”. In the case of cryptocurrency, said trust is not provided by any given government or institution, but by Blockchain technology itself.
The Federal Reserve Bank of New York published an interview on their site Friday, Feb. 9, in which two of its economists explain cryptocurrency, highlighting crypto’s “trustless” nature, but expressing doubt that cryptocurrency could ever “realistically compete with current payment methods.”
Michael Lee and Antoine Martin, both economists in the New York Fed’s Research and Statistics Group, took turns answering questions covering basic concepts of cryptocurrency and financial trust.
On the notion that virtual currencies are not “backed by anything real”, such as gold, Lee declared pointedly:
“You’re right that they virtual currencies are not backed by a physical commodity, but then neither is the dollar and most other modern currencies.”
Is crypto the ‘future of money’?
Responding to the question of whether or not cryptocurrencies would ever become the “future of money”, Martin expressed doubt, stating that the problem cryptocurrency ostensibly solves may not actually need solving, at least not in “advanced economies”:
“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.”
He also cites lack of “convenience” and “extreme volatility” as factors that will keep cryptocurrencies from mainstream adoption as a currency, noting “people do tend to trust financial institutions to handle payments and central banks to maintain the value of money”.
As Lee himself noted in the interview, there is an inverse relationship between trust in the fiat financial system and interest in Bitcoin. During the 2015 financial crisis in Greece, the number of Bitcoin transactions on the network hit a record peak.
A disclaimer at the end of the NY Fed interview makes it clear that the economists’ opinions “do not necessarily reflect” the official position of the Federal Reserve Bank of New York or the Federal Reserve System as a whole.