CONGRESSIONAL REPORT HIGHLIGHTS THREATS OF BITCOIN ON THE US DOLLAR

A new congressional report presents the possible threats Bitcoin might have to the US dollar.

The report titled “Bitcoin: Questions, Answers, and Analysis of Legal Issues” was published on December 20th 2013 to a fairly quiet release to US policy makers. The main subject of the report shows the potential threat Bitcoin can pose on the US dollar and the economy in general.

Report authors Craig K. Elwell, a specialist in macroeconomics, and legislative attorneys M. Maureen Murphy and Michael V. Seitzinger, suggest excessive Bitcoin usage could lead to a monetary policy strain resulting in an increase of the US money supply. The report displays two main factors that could cause such a result.

The first factor relates to Bitcoin being used as a viable currency. Purchasing Bitcoin to convert it back into FIAT money will result in a small impact on the money supply. Using Bitcoin as a substitute for conventional tender would cause circulation issues. The second factor relates to total usage. While Bitcoin may have garnered much press and publicity lately, a lot of people simply do not have Bitcoin, resulting in it becoming illiquid. This creates a polar opposite effect than with US dollars which is highly liquid. Bitcoin would need to be in the hands of more people before it can be considered a competing currency.

If these two scenarios were to happen and Bitcoin is substituted for USD the effect on the US economy could be drastic. A decreased demand for USD could stunt circulation, resulting in issues for the Federal Reserve that in turn will result in less dollar reserves for US banks.

“In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy. At a minimum, a substantial use of bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain,” an expert from the report.

The report also presented the hurdles Bitcoin would need to overcome in order to become a viable currency. According to the report Bitcoin’s main negative aspect is one that is thought to be one of its stronger points, its deflationary value. As Bitcoin is not regulated and has a predetermined cap of 21 million BTC, it is not subject to inflation. This can result in hording, using Bitcoin as an investment rather than a currency.  The claim of hoarding as opposed to spending can be debated, as Bitcoin processers are reporting all-time highs in BTC transactions.

This report came as a surprise after recent congressional hearings resulted in Bitcoin being called a“legitimate” financial service.

The full report can be viewed here.