By Jonathan Spicer
NEW BRUNSWICK, N.J. (Reuters) - The Federal Reserve is in early stages of considering "what it would mean" to offer digital currencies sometime in the future and whether it may be necessary as an alternative to cash, a top U.S. central banker said on Wednesday.
William Dudley, president of the Federal Reserve Bank of New York, has been publicly asked about the virtual currency bitcoin twice in three days this week and has stressed that prospective investors should be cautious because its value is highly unstable and it is not legal tender.
Yet with bitcoin soaring to another record price above $10,000 on Wednesday, he said that it is on the Fed's radar. "At this point it's really premature to be talking about the Federal Reserve offering digital currencies," he told students and professors at Rutgers University.
"But it is something we are starting to think about: what would it mean to have a digital currency, what would it mean to offer it, do we actually need it," he said. "But I would be pretty cautionary" about bitcoin because "it's not a stable store of value and it doesn't really have the characteristics that you'd like to have in a currency."
While the Fed and U.S. Treasury serve as stewards of the world's reserve currency, the dollar, bitcoin, created in 2009, uses encryption and a blockchain database that enables the fast and anonymous transfer of funds outside of a traditional centralized payment system.
It has increased more than 10-fold in value so far this year, posting the largest gain of all asset classes, amid increased institutional demand for crypto-currencies as financial and mainstream use has expanded. Bitcoin hit $11,000 on the Bitstamp exchange (BTC=BTSP) on Wednesday after crossing $10,000 for the first time 12 hours before.
BITCOIN A TULIP?
At a separate forum on Monday, Dudley was asked whether so-called crypto-currencies were "a medium of exchange, a commodity, a roulette wheel, or is it a tulip?" referring to a 17th-century market bubble around Dutch tulip bulbs.
To which he answered that "there was a possibility down the road that central banks could get more involved in offering digital currencies as a substitute for cash," and that they are thinking about whether they could be "a more efficient medium of exchange than cash."
Asked more broadly whether asset bubbles and high leverage in financial markets posed a risk to the economy, Dudley said on Wednesday he was "not that concerned" because the expansion "has a lot more room to go." He added that regulations adopted since the 2007-2009 crisis meant that the U.S. financial system "can bear that stress much, much better than" before.
U.S. stock markets have hit record highs and the spreads between short- and long-term bond yields have narrowed significantly in recent months. The Fed meanwhile has raised rates twice this year and expects to hike again next month.
Dudley, who is set to step down in mid-2018, he was "a bit surprised" that investors did not appear too concerned that interest rates were headed higher.