Think twice before boarding Bitcoin bandwagon, central banks told

Cornelia Mascio
Marzo 13, 2018

The creation of digital currencies, like bitcoin, by central banks could revolutionize the global financial system but also carries significant fraud risks, the Bank for International Settlements warned on Monday.

Jacqueline Loh, chair of the Markets Committee, said that while central bank digital currencies could give central banks a new monetary policy tool that could enhance the transmission of policy rates to the real economy, existing tools can already achieve similar goals. "Any step towards a possible launch of a CBDC should be subject to careful and thorough consideration", added Loh, deputy managing director of the Monetary Authority of Singapore.

The report calls for "robust mitigation methods" before central bankers consider offering official digital currencies.

Benoit Coeure, who chairs the BIS committee on payments and market infrastructure, said there was more caution with the "uncharted waters" of a retail CBDC. "For example, a general objective central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability", Loh warned.

Sweden's Riksbank, the world's oldest central bank, is one of a handful of institutions investigating the possible launch of its own digital currency; in its case a an "e-krona". It said last month its study won't be finalised until late 2019, later than initially indicated. "DLT is where the action is", said Coeure, an European Central Bank executive board member. 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. "At this time, the general judgment is that their volatile valuations, and inadequate investor and consumer protection, make them unsafe to rely on as a common means of payment, a stable store of value or a unit of account", the report said.

This has not crimped the sector's enthusiasm, however.

A key part of the report warned that there could be more, rather than less, financial stability risks posed by central bank issued digital currencies or CBDCs. They meet in Buenos Aires early next week to discuss if new regulation is needed for private cryptocurrencies.

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.

"It's clearly a learning curve and regulators across the world have addressed what are the immediate risks created by private digital tokens", Coeure said. The priority lies with anti-money laundering and terrorist financing safeguards, where cryptocurrencies underlying the futures markets would come later, Coeure said.

"So any discussion in the G20 next week will be likely to be forward looking, discussing the pros and cons of regulation, but don't expect concrete action, it's more about comparing experiences so far", Coeure said.

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