Bank for International Settlements warn Central Banks on Issuing Digital Currencies

China is among the economies most at risk of a banking crisis according to early-warning indicators compiled by the Bank for International Settlements. Petar Kujundzic  Reuters

China is among the economies most at risk of a banking crisis according to early-warning indicators compiled by the Bank for International Settlements. Petar Kujundzic Reuters

The Bank for International Settlements today warned moving into issuing digital currencies would move central banks like the Federal Reserve and the Bank of England into "uncharted territory", with the prospect of "digital runs" on banks in times of stress.

Coeure said that no central bank has so far chose to issue a cryptocurrency.

Jacqueline Loh, chair of the markets committee at the BIS, said: "A general goal central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability".

"But more work and experimentation would be needed to explore these benefits", he added.

Opinions about issuing CBDCs diverge greatly.

The report says digital currencies could change the way money is offered, strengthen payment systems, and be a reliable method to carry out transactions if the use of cash decreases.

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.

Central bank cryptocurrencies could cause deposits to flow out of traditional banks and endanger the stability of the financial system at the next crash, according to an influential central bank body.

The appeal of a such a currency would be more pronounced if it were interest-bearing.

"The potential effect of fraud could be more significant because of the ease with which large amounts could be transferred electronically", states the report by the BIS, which is often described as the central bank of central banks.

The BIS also highlighted that, like banknotes, digital currencies can fall victim to illegalities - as a direct target or a means of transaction.

"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.

Coeure indicated on a conference call with reporters that the initiative to regulate private cryptocurrencies, led by Germany and France, probably won't immediately result in concrete action. "The policy issues that this would raise, for central banks and society more generally, need careful consideration".

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