Federal Reserve official warns digital currencies like bitcoin could pose financial stability problems if they gain wider use

 
Rebecca Smith
The Fed's vice chair for supervision said bitcoin could be a risk if it becomes more popular
The Fed's vice chair for supervision said bitcoin could be a risk if it becomes more popular (Source: Getty)

A Federal Reserve official has said that digital currencies like bitcoin could pose a threat to financial stability if they pick up wider use.

The notoriously volatile cryptocurrency had a rollercoaster ride yesterday, spiking to a fresh high topping $11,000 before slumping 20 per cent, and then picking up the pace again.

And Randal Quarles, the Fed vice chair for supervision, said at the Financial Stability and Fintech Conference that a currency not directly tied to the dollar could come with some serious risks.

Read more: This massive private equity investor reckons the bitcoin bubble will burst

The currency, or asset, at the centre of these digital currency systems, "is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all", Quarles pointed out.

He said:

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.

"Risk management can act as a mitigant, but if the central asset in a payment system cannot be predictably redeemed for the US dollar at a stable exchange rate in times of adversity, the resulting price risk and potential liquidity and credit risk pose a large challenge for the system," he added. "During times of crisis, the demand for liquidity can increase significantly, including the demand for the central asset used in settling payments."

Quarles said even private sector banks and "certainly non-banks" can have a difficult time meeting large scale demands for extra liquidity "at the very time when their balance sheets may be in question".

That inability to meed the demand for extra liquidity, can then have "spillover effects" to other areas of the financial system, he said.

His comments come after Goldman Sachs boss Lloyd Blankfein said it was too early for his bank to need a bitcoin strategy, and that he does not consider the digital currency to be a store of value.

In an interview with Bloomberg, Blankfein said: "Something that moves up and down 20 per cent in a day doesn't feel like a currency, doesn't feel like a store of value."

He added: "If it works out, and it gets more established, and it trades more like a store of value, and it doesn't move up and down 20 per cent, and there is liquidity to it - we'll get to it."

Bitcoin has been on the move again today, having risen earlier only to drop back down, and at the time of writing was at $9,592.43, according to Coin Desk's aggregate index.

Read more: It's another rollercoaster day for bitcoin

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