Wednesday, April 5, 2017

Digital currency unlikely to ‘drive out’ dollars, says Philadelphia Fed’s Harker

By J. Preston Carter, J.D., LL.M.

Unless the government issues digital currency, it will not likely "drive out" currency issued by the central bank of a credible and stable government "any time soon," according to Federal Reserve Bank of Philadelphia President Patrick Harker in prepared remarks on April 3, 2017. At the University of Pennsylvania School of Engineering and Applied Science, Harker also touched on interest rate increases by the Fed, and said, "I view three rate hikes as appropriate in 2017, assuming things stay on track." He added, "I continue to believe they should be gradual, both in pace and increments."
In his address—Fintech: Revolution or Evolution?—Harker said the question regarding digital currency is whether there will ever be one that is stable enough to become as widely used as a government one. Privately issued currencies can lead to unstable money supply and depreciation of the currency, he said, because there’s no fundamental guarantee of its value in the same way that there is with currency issued by a central bank. Harker noted that some governments are exploring the possibility of producing their own digital currencies. However, he mentioned that several hurdles remain, including technical challenges, the risk of cyber attacks, the potential for criminal activity such as money laundering, and threats to privacy.
Even if fintech is "wildly successful," Harker said, "Banks aren’t going anywhere." Comparing bankers to real estate agents, who survived the advent of e-commerce better than travel agents, Harker stressed that, "no matter what happens in the world of fintech, you still need a trusted broker of money. The roles may change and adapt, but someone needs to be the source of funds and credit."
Harker told the audience that "a large portion of government’s role in fintech will be regulation." Regulators must create oversight that allows for innovation while protecting markets and consumers, he said. "[I]t’s in fintech firms’ best interest to know what’s expected from them from the beginning."
Harker said fintech is not so much a revolution as a continuing evolution that the banking system has seen for the past 40 years, with, for example, securitization, credit scoring, and prepaid cards. "[I]t’s just a different delivery system."
For more information about financial technology in the financial industry, subscribe to the Banking and Finance Law Daily.