Let’s take a deep breath on the FSOC report’s ‘warning on Bitcoin’

Neither Bitcoin nor digital currencies are the subject of the warnings. As the authors say, their concern is “migration” of existing financial systems to distributed ledgers.

The Financial Stability Oversight Council yesterday released its annual report and in it noted “distributed ledger technology” in its discussion of “potential emerging threats and vulnerabilities” to the U.S. financial system. The discussion is part of a short section on financial innovation,  including marketplace lending, and the potential risks they may pose.

The report’s authors are at pains to convey that this a potential threat posed by the migration of existing centralized financial systems to distributed ledgers, and cites to Bitcoin’s recent transaction delays only as an example of the challenges of distributed ledgers. The only conclusion the short section draws is that all that is needed at the moment is greater awareness, study, and coordination by regulators.  Nevertheless, this is the headline in the Financial Times today:

Regulators say bitcoin poses 'financial stability risks'
Financial Stability Oversight Council raises concern over uncertainties of using digital currencies

The article goes on to conflate the Bitcoin network and the general increased interest in distributed ledgers by financial intermediaries that the report discussed. Other news outlets have not done better. These sensationalist news reports do not reflect the substance of the report.

You should go read it yourself. Of the report’s 146 pages, only one page discusses distributed ledgers. Most of that page is dedicated to explaining the technology and highlighting its potential benefits, but we see no news stories about that. The focus is on the one paragraph that points out this technology is new and experimental and regulators should learn more about it, which is a perfectly reasonable thing to suggest.

Neither Bitcoin nor digital currencies are the subject of the warnings. As the authors say, their concern is “migration” of existing financial systems to distributed ledgers — not digital currencies. They only mention Bitcoin as an example of a blockchain that has had scaling challenges. That’s it. And of course it make perfect sense that the FSOC would not consider Bitcoin a risk to the U.S.’s financial stability given that the digital currency’s total global market cap is only $10 billion.

Of course, reporting the facts probably doesn’t garner as many clicks as a sensationalized account, and that matters when your business model is advertising driven. Maybe a micro-transaction business model would help…

Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.