The Federal Advisory Council (FAC), a group that consults with the Federal Reserve on all matters under the US central bank’s jurisdiction, and the Federal Reserve Board of Governors recently discussed bitcoin and its potential benefits at a quarterly meeting.

Held on 9th May, the FAC and the Board of Governors debated whether bitcoin posed a threat to the traditional banking system, economic activity or financial stability, ultimately issuing a surprisingly positive two-and-a-half-page assessment of the technology.

Perhaps most notably, the meeting focused on how bitcoin could empower a new wave of commerce innovation – opening new markets to merchants, driving capital flows to the developing world and increasing global economic consumption.

Meeting minutes stated:

“Bitcoin does not present a threat to economic activity by disrupting traditional channels of commerce; rather, it could serve as a boon.”

Further, despite its highly publicized use in illicit transactions, the minutes suggest that the FAC believes bitcoin has “room to improve”, and that its price volatility is “likely to diminish over time”.

The meeting minutes are a notable contrast to recent statements from other international central banks taking a less progressive, and arguably hostile, view of the technology.

More curiosity than threat

The meeting minutes suggest that the two groups believe bitcoin does not present “a near-term threat” to banking by way of disintermediation, noting that “bitcoin transactions correspond to only a fraction of today’s global fund flows”.

The minutes went on to detail how security and volatility concerns are likely to limit bitcoin adoption, stating:

“Extreme price volatility is similar to other speculative forms of stored value, undermining Bitcoin’s credibility. […] Susceptibility to theft increases uncertainty for users seeking alternatives to traditional institution-based deposits.”

Payment processors may be forced to react

The meeting minutes suggested that the FAC and the Board of Governors believe the most likely impact bitcoin will have on the traditional financial world relates to payment processing.

By enabling lower transaction fees, facilitating cost-effective micropayments and extending financial services easily to the developing world, the report suggests bitcoin could provide powerful incentives to consumers and win customers away from more established service providers.

Still, the FAC believes there is opportunity in the space for banks, as well, noting:

“Should adoption accelerate, banking could participate increasingly in bitcoin fund flows, especially as multi-currency accounts proliferate and reputational concerns subside.”

Regulation advised

The FAC concluded that regulating the industry could have many benefits, including addressing illicit use and providing consumer protection. Overall, the FAC advocates for a middle-ground approach to regulation.

The minutes read:

“Bitcoin advocates may argue that increased regulation minimizes one of its greatest advantages, namely decentralization. Recent events suggest that some flexibility should be sacrificed to address obvious problems.”

For example, the FAC suggested that bitcoin’s susceptibility to theft could be addressed by regulation for bitcoin exchanges, and that likewise, bitcoin wallet providers could benefit from rules that govern how bitcoins are stored.

Know-your-customer (KYC) regulations were also advised as a way to reduce the use of bitcoin in criminal transactions.

Limitations

While seemingly positive, the FAC reiterated past criticisms of the bitcoin network, such as the potential for the network to be compromised by miners, and limited money supply provided by the technology, which could in turn prevent the application of traditional monetary policy tools. The document also noted the risk of shadow transactions between banks using bitcoin.

The meeting minutes, while positive, do not necessarily indicate that the Federal Reserve will alter its current stance regarding bitcoin.

This February, Federal Reserve chairwoman Janet Yellen stated that the US central bank does not have the authority to regulate bitcoin.

The statement was issued during an address to the Senate Banking Committee, and prompted by US Senator Joe Manchin, who had previously lobbied for the US government to take a harsh stance against the technology.

US Federal Reserve building via Shutterstock