Western central banks are becoming more receptive to engaging with cryptocurrency amid soaring valuations and a crypto-friendly administration taking office in the US.
Though we should not generalise, separate statements by the chiefs of the US Federal Reserve and the Czech National Bank this week show a willingness to develop crypto across both medium-sized and large Western economies.
The Fed changes its tone
Starting first with the US, where much of the hype around crypto over the past six months has originated, Federal Reserve Chair, Jereme Powell, has spoken favourably of mainstream US banks working with crypto clients. The Fed Chair does not want to stifle innovation, he said in a press conference.
“Banks are perfectly able to serve crypto customers as long as they can understand and service the risks,” Powell remarked, adding that the central bank does not want to ‘stifle innovation’ by cutting off banks from crypto clients.
This suggests a significant change in tone at the Fed, though it is also likely indicative of the impact the change in administrations is already having on the US central banking system’s agenda on crypto and digital assets overall.
The Biden administration was particularly cautious when it came to handling the sector – and in the viewpoint of many crypto stakeholders in the US, outright confrontational. In comparison, the new Trump administration is outspokenly in favour of privately held cryptocurrencies and stablecoins, though adamantly opposed to Central Bank Digital Currencies (CBDCs).
Of course, concerns around crypto will still remain and these have been alluded to by Powell when noting ‘the risks’. Crypto-related scams, such as incidents of ‘rug pulling’, are hardly uncommon, and law enforcement and intelligence communities continue to investigate cases of digital currencies being used to launder money and finance criminal activity.
Though they may have found some shaky common ground on crypto, the Trump administration and Fed still remain at loggerheads. The President lambasted Powell shortly after the press conference, not for his comments on crypto, but due to the central bank holding interest rates after Trump called for a significant reduction.
Could the Czech Republic make a crypto first?
Turning to Europe, the Governor of the Czech Central Bank has directly referenced Trump’s enthusiasm for crypto as a sign of changing times. Aleš Michl seems to have an ambition of positioning the Czech Republic as a leading adopter in the EU.
In an interview with FT, published on the bank’s website, Michl told the outlet that he will propose plans to the National Bank’s board to invest up to 5% of its €140bn reserves in Bitcoin. If approved, it will become the first Western central bank to do so.
“For the diversification of our assets, Bitcoin seems good,” he said. “Those [Trump] guys can now kind of create some bubble for Bitcoin, but I think the trend would be an increase without those guys as well, because it’s an alternative [investment] for more people.”
So far, national central banks have, for the most part, been reluctant to engage too closely with the crypto market. Concerns around volatility and money laundering are two of the most commonly cited reasons for this.
El Salvador is the notable outlier to this, being the first country to officially adopt Bitcoin as legal tender alongside its national currency, the Colón. In contrast, most Western central banks have limited engagement, largely to explore the possibility of a CBDC.
Others have been outwardly critical of crypto. The European Central Bank (ECB) in particular has lashed out at Bitcoin in the past, calling it unsuitable as either a payment method or an investment opportunity.
Michl’s ambitions could therefore put the Czech National Bank at loggerheads with the ECB, with the Czech Republic also being one of only seven of the EU’s 27 member countries to not adopt the euro.