World's central banks cautioned on cryptocurrency risks

Marco Green
March 13, 2018

Central banks should steer clear of developing their own digital currencies for issue to the general public the Bank for International Settlements has warned. The rise of distributed-ledger technologies and the peer-to-peer concept of private digital money challenges the raison d'être of central banks, which for centuries have dominated currency issuance and paid their bills by doing it.

"General-purpose central-bank digital currencies could revolutionize the way money is provided and the role of central banks in the financial system, but these are uncharted waters", said Benoit Coeure, a European Central Bank board member who chairs the BIS committee on payments and market infrastructures.

And even though bitcoin has lost half of its value in recent months and a year ago some $5.6bn was raised through initial coin offers (ICOs), the craze for cryptocurrencies shows no signs of abating.

A global financial body warns central banks should carefully weigh the risks before introducing their own virtual currencies, saying such innovations could risk destabilizing banking systems and unleash disruption across borders.

"Central bank digital currencies could help make settling trades of securities and foreign exchange more efficient in the future".

The report looks at the possible impact of a "wholesale" digital currency only for a limited audience like banks, and a "retail" version for all.

The reality is that cryptocurrencies aren't regulated and their fluctuations are more reminiscent of Dutch tulip auctions and dot-com booms than sensible financial policy. Now such transactions use a massive and complex web of critical infrastructure - much of it based in London - which could in theory become defunct (or at least see major reductions) if the need for a trusted middleman is removed.

In separate comments on the report's findings, European Central Bank and BIS executives Benoît Cœuré and Jacqueline Loh said that decentralized digital currency, specifically Bitcoin, was "not the answer to the cashless economy".

The Bank of Englabnd's Mark Carney says the BIS perspective is an important contribution to the G20 discussion on digital currencies, given central banks' mandate to safeguard financial stability for the public.

It found that wholesale CBDC might be useful for payments but more work is needed to assess their full potential.

The issuance of CBDCs probably wouldn't change the basic mechanisms for carrying out monetary policy, the BIS said.

The report said virtual money issued by a country's central bank could, if widely used in cross-border transactions, lead to disruptive worldwide capital flows and exchange rate fluctuations. Everyone else can access money issued by the central bank in the form of cold hard cash.

"Depending on the context, the shift in deposits could be large in times of stress".

"The more other depositors run from weaker banks, the greater the incentive to run oneself".

Whatever happens, the cryptocurrency craze shows no signs of abating.

Other reports by Click Lancashire

Discuss This Article