Money

Banks warned to weigh risks of issuing their own virtual currencies

March 13, 2018 22:03·

Central bank cryptocurrencies a danger to global financial stability says Bank for International Settlements

"General goal central bank digital currencies could revolutionize the way money is provided and the role of central banks in the financial system", said Coeure.

"Technological developments have raised questions about the feasibility and desirability of combining distributed ledger technology with the trust inherent in fiat currencies to create a central bank digital currency available to all", Carney, who chairs the BIS's Global Economy Meeting and the Financial Stability Board, said in a statement alongside the report.

"Arguably, the most significant and plausible financial stability risk of a general goal CBDC is that it can facilitate a flight away from private financial institutions and markets towards the central bank".

The report noted that any virtual currency would have to comply with requirements aimed at stopping money laundering and financing of terrorism.

The report doesn't dismiss the idea.

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.

"Central bank digital currencies could help make settling trades of securities and foreign exchange more efficient in the future", said Benoit Coeure, chair of the Committee on Payments and Market Infrastructures (CPMI), part of BIS.

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There was no evidence that digital currencies would allow central banks to implement monetary policy better than with tools they already have.

In a report, the Bank for International Settlements (BIS) said the launch of cryptocurrencies by central banks had potential benefits but could also have a detrimental impact, including exposing banking centers to a greater risk of cyber attacks. Everyone else can access money issued by the central bank in the form of cold hard cash.

The BIS concluded that wholesale digital currencies and their underlying technologies have the potential to make settlement of securities and derivatives transactions more efficient, even though proposals so far look broadly similar and not clearly superior to those in place. 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. "DLT is where the action is", said Coeure, an European Central Bank executive board member.

It has considered the move due to a decline in the use of cash in Sweden. While Federal Reserve chairman Jerome Powell and Bank of England Governor Mark Carney have expressed skepticism, the Riksbank in Sweden, where more than a third of the population never uses cash, is considering the introduction of an e-krona as a complement to banknotes and coins.

The hands-off approach to CBDCs further broadens the divide between the European Union and other countries' central banks on the concept. A decision is expected later this year or early next year.

The BIS report comes at a time when privately issued cryptocurrencies like Bitcoin have seen huge price swings to trigger stark investor warnings from regulators.

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