US Federal Reserve Chairman Jerome Powell gestures as he speaks at a press conference after the … [+]
Federal Reserve Chair Jerome Powell just ignited a sea change for the entire global financial system, and he may not even know it yet.
On Wednesday morning, the central banker acknowledged that banks are indeed capable of offering cryptocurrency services, and that the Federal Reserve should not make things too difficult for them.
“You don’t want to go too far,” he told the House Financial Services Committee. “There were a bunch of disasters, and we were reacting in some extent to those. You don’t want to go so far as to overplay your hand on that. I think we need to be mindful that many of these activities can very well be done inside of banks, and custody may well be one of them.”
This is more than a nod to the burgeoning digital asset market. We are making room for a return to the roots of banking, and potentially ushering in an era where Bitcoin could restore banks to their former glory.
Consider the historical precedents of “free banking”: Scotland in the 19th century, and the United States during its era before the Civil War. Per the Cato Institute, both periods were marked by economic booms, light regulations, banking innovation, and disciplined markets with very few bank failures.
The discipline was enforced not by governments, but by market dynamics where banks had to maintain reserves or face the consequences of public withdrawal. Notably, Scotland allowed many banks to issue banknotes all backed by either gold or silver at the time.
Now consider bitcoin: much like these scarce precious metals, bitcoin is now widely regarded as “digital gold,” including by both Larry Fink and Jerome Powell himself. Unlike central bank-issued currencies, bitcoin’s fixed supply enforces market discipline, as in the case of a bank run, nobody can create more coins to bail them out.
Under this new light, banks could revert to being custodians and lenders of hard money, akin to their original purpose. Combine this with the Republicans’ commitment to ending the debanking of crypto firms, and the SEC allowing banks to custody crypto again, and we’ve set the stage for a potential return to free banking.
This is a counterintuitive way to think about Bitcoin, but a logical one. The enemy of Bitcoin is not the banking system itself, but the corrupt, cartel banking system that we have today – which is not a free market. A system with entrenched players protected by stifling regulations, a lack of competition, and a central bank to protect them from their mistakes.
A return to hard money and free banking seems unimaginable, but our current model is still a historical blip. Free banking ended in the U.S. in 1963 so the Union could fund its war with a uniform currency. The Federal Reserve was only established in 1913. President Trump is already waxing nostalgic about times before that, including the turn of the 20th century when the income tax did not yet exist.
Considering Trump’s rocky relationship with Powell already, and the willingness of many Republicans to abolish the federal reserve, such radical change certainly isn’t off the table.
Bitcoin is already making people rich. Bitcoin banking will make the United States even richer.
