The Bank for International Settlements has warned Central bankers that they risk endangering the stability of the global financial system if they launch their own digital currencies in an effort to destroy competition from rivals from outside the official sphere.
“A central bank digital currency could allow for ‘digital runs’ towards the central bank with unprecedented speed and scale,” the Basel-based BIS said in a report put together by its committees for payments and markets.
Some central banks, including the world’s oldest, Sweden’s Riksbank, have mooted creating their own cryptocurrency in response to the declining influence of cash as a means of payment – reports the FT.
The Swiss National Bank has also investigated the idea. Existing forms of digital money such as bitcoin and ethereum also pose a threat to central banks’ status as the monopoly issuers of official currency, offering users more privacy and quicker payments.
However, the BIS on Monday cautioned that making electronic central bank money widely available could create a significant threat to the financial system. The reason: if the public had direct access to the currency, they would flock to the central bank in times of panic, creating a “digital run” from private banks to the state.
If the digital money was issued by one of the major central banks, this could even lead to cross-border panics as capital took flight from riskier assets and financial institutions in countries experiencing turmoil and into state-backed cryptocurrencies elsewhere.
The publication of the report comes ahead of important Group of 20 talks in Buenos Aires later this month when top central bankers are set to decide how to contain the threat posed by bitcoin and other cryptocurrencies.
While central banks have long provided electronic currency to banks, they only issue money to the public in the form of banknotes and coins. That has left central banks susceptible to competition from other electronic currencies, should public trust in them grow and their acceptance become more commonplace.
“Any steps towards the launch [of central bank digital currencies]should be subject to careful and thorough consideration,” said Jacqueline Loh, who chairs the BIS’s markets committee. Ms Loh, who has presided over experiments that offered digital currencies to wholesale market participants in her role as deputy managing director of Singapore’s central bank, acknowledged that any decision would ultimately have to be made at state level.
Central banks have stepped up their criticism of private cryptocurrencies in recent months. Agustín Carstens, the BIS’s general manager, last month labelled bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Many in the central bank community believe that the answer to the competition threat posed by the blockchain technology that facilitates payments by bitcoin lies in improving existing systems of payment.
“Efficient private payment solutions are already in place,” said Benoît Cœuré, who chairs the BIS’s committee on payments and market infrastructures and a member of the European Central Bank’s executive board.
“The best way for central banks to face the challenge is to make our existing payment systems faster and cheaper and also cross-border.”