Ron Paul: No, cryptocurrency is not something the Fed should be getting its 'hands around'

PayPal is perhaps the best way ever designed to move money from one person to another. Yet it started in failure.

In his book, “Zero to One: Notes on Startups, or How to Build the Future,” founder Peter Thiel explains that PayPal was originally intended to allow owners of PalmPilots to beam money to each other. That idea did not work, but it evolved into using similar technology on eBay auctions.

The point is that PayPal was a private company competing in the market economy. That meant it was subject to market discipline. It had to develop an effective product or it would go out of business. The same thing cannot be said of the federal government.

In its latest bad idea, movement is building for the Federal Reserve to establish its own cryptocurrency exchange to compete with others in the marketplace and even replace physical cash.

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“It is inevitable,” Federal Reserve Bank of Philadelphia President Patrick Harker reportedly said at a recent conference. “I think it is better for us to start getting our hands around it.”

It’s an apt metaphor, since what the Fed always wants to choke off is any competition to its monetary monopoly. This comes hot on the heels of another bad idea, called FedNow, which is supposed to speed up the processing of financial transactions.

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Speed is great, of course. It can take a full business day for transactions to clear. That’s too slow in our 21st century world of instant communication.

But the Fed is late to the party. The Clearing House launched a real-time payment system two years ago that now reaches half the banks in the country. It’s expected to be everywhere by next year.

Judging by the non-answers that the central bank has given to members of Congress on its interoperability with private sector systems, FedNow would seemingly not compete on a level playing field; it would simply use the power of the federal government to crush a private-sector competitor.

Proponents of a Fed-run crypto exchange argue that such an exchange could stop the current delays in the U.S. bank transfers entirely on its own. This thought proves just how bad the Fed is at making good investments, anticipating changes in technology, and keeping up with the speed of innovation.

If board members of the central bank believe that blockchain may soon supplant the need for real-time payment services like FedNow, why the Fed would spend the next 3-5 years building FedNow from scratch when The Clearing House already offers the same type of service is beyond me.

If board members of the central bank believe that blockchain may soon supplant the need for real-time payment services like FedNow, why the Fed would spend the next 3-5 years building FedNow from scratch when The Clearing House already offers the same type of service is beyond me.

The Fed should stay out of the way and let the private sector blockchain and real-time payments marketplaces settle this debate. Instead, the central bank seems poised to set itself up as both the regulator of all monetary exchanges and a participant in that business.

Without assurances on interoperability from the central bank, businesses will always choose the Fed’s offerings instead of a private company’s, since doing so would make the business look better to its regulator.

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The Fed cannot handle real competition, and so it is trying to shut it down. It worries about Bitcoin, it worries about The Clearing House, and it will be worried about the next bright idea for money sharing that comes along. It’s got a monopoly to protect.

We need to open up the field for new forms of money. While I served in Congress, I introduced the Free Competition in Currency Act, which would have defined money as whatever people are willing to trade with each other, whether that’s paper, tokens of some sort, or direct barter. It would have ended the Fed’s power to declare that only certain pieces of paper are currency.

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Let’s allow companies to compete, and let the market set the value. That’s where the next PayPal will come from, and consumers everywhere will be the winners.

Dr. Ron Paul, a former congressman from Texas, is the chairman of Campaign for Liberty.