North Bay banks, credit unions wary of Fed digital currency proposal

Already tasked with a full plate of issues now, the Federal Reserve has expressed interest in launching its own digital currency, prompting skepticism and questions from North Bay banks and credit unions.

The central bank released on Jan. 20 a 36-page written report “Money and Payments: The U.S. Dollar in the Age of Digital Information,” in which the Fed evaluated both the pros and cons of starting a government-endorsed digital currency.

Cryptocurrency is a virtual, peer-to-peer system that bypasses banks to verify the transactions. Instead, encrypted transactions are done on a public ledger, called a blockchain. One of the more common digital currencies is Bitcoin.

Backers say it’s secure and provides benefits such as alleviating government interference. But that feature alone has also prompted a little apprehension from some, as North Bay bankers and credit union leaders provided a mixed reaction to the significant step made last month.

“I think the jury is still out on this. The simple question is, when you boil it down, is, ‘What is it?’” said Todd Lowenstein, the Santa Barbara-based managing director and equity strategy executive with Union Bank in The Private Bank division.

Lowenstein expressed concerns that the government backing this form of currency that started in 2009 may result in a detrimental effect on our cash system by replacing it with one that resembles an unregulated “shadow economy” with generally a lot fewer, if any, accountability measures.

The risk may lie with the unknowns of disrupting a $6.39 trillion economy ($4.18 million parked at the central bank; and $2.21 trillion circulating in the economy), according to the Federal Reserve report.

“When it first came out, it was underground,” Lowenstein said. “(Now) how do we establish what it’s worth?”

Digital currency has also come up as the subject of crimes. In the Colonial Pipeline ransom demand last summer, the Houston-based pipeline company paid hackers 75 Bitcoins valued at $4 million before the Federal Bureau of Investigations recovered the payoff, the U.S. Department of Justice reported last June.

Moreover, the cryptocurrency out there, which the Fed admits has “not been widely adopted” as a means of payment in the United States, is subject to price volatility. The new type of digital currency, stablecoins, were introduced to thwart these swings. Backers tout them as more stable because investors have tied their value to other assets.

Lowenstein suggested the Federal Reserve may have initiated a report to appease crypto enthusiasts striving to keep an open dialogue going.

If anything, studying the benefits of digital currency may lead to establishing the infrastructure to be used at a later date, Lowenstein pointed out. It would be like developing the “plumbing” of the Internet before dumping in the content.

Alkesh Shah, the chief of Bank of America’s Crypto & Digital Assets Strategy division, cited the merging of a Fed cryptocurrency in our monetary system as an “inevitable evolution of today’s electronic currency,” with the liability falling on the Central Bank.

Crypto supporters have also touted the form of currency as helping those who don’t hold traditional banking accounts, Shah stated in his report. He estimates a U.S.-backed digital currency would be in place between 2025 and 2030.

Until then, it may be too soon to jump on the all-systems-go strategy.

“I think it’s premature. It’s not the right time,” Summit State Bank CEO Brian Reed said.

The Santa Rosa bank executives attended a three-day, “soup-to-nuts” seminar that talked about cryptocurrency’s impact on the financial market. Reed walked away surmising that “the worst thing is the market is unregulated,’” he said.

Leaders of other financial institutions agree.

Jeremy Empol, the vice president of federal government affairs with the California and Nevada Credit Union Leagues, a trade group based in Ontario, said: “It needs to be treated as a level playing field, so customers know what they’re getting into when they walk in the door.”

North Bay Credit Union CEO Chris Call expressed the issue of timing.

“We’re going to wait and see, because right now the market is volatile,” he said.

Call pointed out that other times in history have brought about boasting of revamping a far-reaching U.S. system.

“I remember when the metric system was introduced,” he said, referring to the widespread belief it would become the common system of measurement for the nation.

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or susan.wood@busjrnl.com.