Fed vice chair: Central banks should ‘tread cautiously’ with digital currency

Randy Quarles, the Federal Reserve vice chairman of supervision, said Thursday that the widespread use of digital currencies could threaten financial stability, adding that central banks should “tread cautiously” when considering creating their own.

“While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage,” Quarles said.

Quarles, who oversees financial regulatory issues for the Fed, said in the Thursday speech that while digital currencies such as Bitcoin could yield useful innovation in finance, they also pose several risks to the global financial system.

{mosads}Quarles expressed concerns about the often-volatile value of digital currencies and whether they could be easily exchanged for government currencies at a fixed rate during times of crisis. He also said that the U.S. banking system lacks the technology necessary to make real-time digital currency changes happen with the regularity needed to run an economy.

Quarles’s comments come as the broader financial system mulls how to handle the rise of digital currency.

Bitcoin, one of the most popular digital currencies, has exploded in value over the past year, eclipsing $11,000 this week. It dropped sharply soon after by 8 percent, but is now recovering its losses.

“Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the center of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress,” Quarles said.

Quarles said he was “optimistic” about the future of digital currencies and noted that the technologies backing them, such as distributed ledger systems, could be critical moving forward.

He approved of the approach taken by several financial institutions to embrace those systems without the specific currency that they’ve been created to serve.

“Working cooperatively, private-sector participants and central banks can incorporate innovation that may be able to strike the right balance of improving the technical networks without adversely generating financial stability concerns,” Quarles said.