Jerome H. Powell, a governor of the Federal Reserve who the New York Times reports is President Donald Trump’s nominee to be the next Fed chairman, discussed distributed ledger technology (DLT) at some length during a March 3, 2017, speech at the Yale Law School Center for the Study of Corporate Law.
Powell, who has occupied his current Fed post since 2012, said at the event (called “Blockchain, The Future of Finance and Capital Markets?”) that central banks weighing the possibility of issuing digital currencies “should have serious reservations” about their abilities to combat “cyber attacks, cyber counterfeiting, and cyber theft.” Such acts of malfeasance, he warned, could be committed by actors the world over and could “significantly exceed historical experience with paper currency.”
He also argued that a central bank-backed digital currency could have serious implications regarding its users’ privacy: “In today's environment, commercial banks maintain extensive records for individual debit and credit card transactions and increasingly monitor patterns of behavior for fraud. Such records in the hands of a central bank or government entity, however, could raise serious privacy concerns.” Additionally, he claimed, as cryptographic security measures are enhanced to prevent fraud, digital currencies become more effective tools for hiding “illegal activity,” including money laundering.
“To my mind,” Powell opined, central bankers “should also consider whether the private sector can substantially meet the same needs.” Should they choose to introduce it, their currency would compete with “private-sector products and may stifle innovation over the long run.”
Speaking more generally, he said:
“We should be open to the new ideas and innovations that will drive economic growth and improvements in our financial system ... Disruptive new technologies suggest that traditional financial service providers must innovate and adapt or be left behind.”
He pointed out that in the financial sector, where he said DLT “may have important implications,” many of the technology’s use cases currently being trialed or conceived involve permissioned systems. While many enthusiasts believe that the technology’s greatest promise lies in its decentralized architecture, Powell defended the finance industry’s current preference for permissioned ledgers, explaining that “safety and confidence must also weigh in the balance.” He also sought to temper some of the excitement that DLT has spawned, noting that adoption would be slow because “upgrades are often costly, lengthy, and risky,” and network effects “can also affect adoption, since multiple firms may all need to adopt a particular implementation of DLT in order to justify its use in a specific market.” Furthermore, “standardization and interoperability across different versions of DLT will need to be addressed to allow technology integration and avoid market fragmentation.”
He added that if DLT adoption ramps up, laws will need to be updated or supplemented in order to make provision for the legal gray area that the novel technology would necessarily generate.
“If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network and the financial system in response to events. This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management.”