Fed Economists: Cryptocurrencies “Provide a Store of Value” in a “Trustless Environment”


Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function, said cryptos are a store of value with the added benefit they “solve the problem of making payments in a trustless environment.”

“Like any functioning form of currency, cryptocurrencies facilitate payments between parties and provide a store of value,” Lee said before adding:

“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… Some of these problems go away with cash because when I hand cash to the grocer, there is no need for trusted intermediaries.

But if you think about it, even cash requires some trust. The grocer has to believe that the cash I pay with will retain its value and not be eroded by inflation or confiscatory monetary reforms. So she needs to trust the central bank.”

Cryptos, of course, do not have a central bank, nor can any one person or group control them. The only aspect you need to trust is 51% of the people, if that.

Cryptos “are not backed by a physical commodity,” Lee says. “But then neither is the dollar and most other modern currencies.

It’s long been known that currencies that are intrinsically worthless, mere pieces of paper are recognized as valuable because payments with money are so much easier than the alternative, barter.”

Lee argues the value of money does not come from anything intrinsic, but from its function as a means of exchange, a function arguably some cryptos do far better than established alternatives.

“Wider adoption and acceptance of cryptocurrencies as a payment option naturally increases what they are worth,” Lee says.

They further argue crypto’s value increases when trust in central banks decreases. No one can argue, for example, that Venezuelans would far prefer crypto to worthless Bolivar if they knew what cryptos are and merchants accept it.

“When Greece fell deeper into financial distress in 2015, Greek interests and trading in bitcoin rose quickly amidst fears of capital controls and the possibility of exiting the eurozone. Bitcoin became attractive as trust eroded,” Lee said.

Considering the unprecedented money printing central banks have undertaken for much of this decade, with ECB continuing to print 60 billion euros a month, some trust in the dollar or pound might have eroded due to inflation concerns, which could in party explain the stupendous crypto rise of 2017.

“Cryptocurrencies arguably solve the problem of making payments in a trustless environment,” Martin said before further adding:

“Bitcoin and other cryptocurrencies are trying to improve scalability and convenience so perhaps in the future one of these cryptocurrencies could realistically compete with current payment methods.”

They further touched on volatility, which remains significant due to lack of wide crypto acceptance, and they also argued requiring trust in the fed or central banks isn’t a problem, although we’d argue Greece, Venezuela, Cyprus, China’s devaluation, Yugoslavia in the 90s, Zimbabwe, and far too many more to mention, say very much otherwise.


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