BIS Cautions CBs Launching Own Cryptocurrencies

A report by the Bank for International Settlements has warned that a central bank-issued cryptocurrencies like Fedcoin or Ekrona could cause bank runs and challenge banking business models.

While cryptocurrencies like Bitcoin and Ether enjoy an enormous surge in interest, several central banks have been quietly exploring the idea of creating their own digital currencies, World Finance reported.

A publically available digital currency issued by a central bank would be totally unchartered territory, but would do away with the inherent volatility of traditional cryptocurrencies while retaining their anonymity and peer-to-peer capabilities. And yet, as the Bank for International Settlements outlined in its recent special feature report, they would also have far-reaching economic implications, such as potential bank runs and changes to monetary policy.

As the report notes, the introduction of digital cash could cause consumers to forgo commercial bank deposits and instead opt to bank directly with the central bank. This could render banks less able to perform “essential economic functions”, like monitoring borrowers. Another danger is that bank runs could occur more quickly if people were able to easily convert their bank deposits into risk-free central bank liabilities.

“In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains–in terms of payments, clearing and settlement– but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy,” the report concludes.

Cryptocurrencies have entered the consciousness of central banks and their most senior officials over the course of the last couple of years. Earlier this year, for example, Jens Weidmann, the head of Germany's Bundesbank warned that digital currencies like Bitcoin have the potential to make financial crises in the future even more devastating.

Weidmann said he believes that central banks will eventually create their own digital currencies to reassure average citizens that such currencies are safe and stable, but in doing so could increase the risk of bank runs in future crises.