Bitcoin 'could be threat to financial stability'

It is unclear how digital currencies like bitcoin will behave in a crisis, warned Fed vice-chairman for supervision Randal Quarles. If they could not be predictably exchanged for the US dollar at a stable rate in "times of adversity", this could crea
It is unclear how digital currencies like bitcoin will behave in a crisis, warned Fed vice-chairman for supervision Randal Quarles. If they could not be predictably exchanged for the US dollar at a stable rate in "times of adversity", this could create a "large challenge to the system".PHOTO: REUTERS

US Fed vice-chair warns digital currencies could create challenge to system if they are widely used

WASHINGTON • Digital currencies like bitcoin could pose a threat to financial stability as they gain wider use, a chief Federal Reserve banking oversight official said on Thursday.

The remarks from newly installed Fed vice-chairman for supervision Randal Quarles came as bitcoin took a vertiginous dive on Thursday after skyrocketing earlier in the week to more than 10 times its value at the start of the year.

Bitcoin is increasingly being embraced by Wall Street, with plans by mainstream markets to offer trading in the currency's futures, which is drawing interest and some concern from regulators.

Mr Quarles raised concerns about how cryptocurrencies would behave in a crisis. In a speech on the payments system, he said that in times of crisis, demand for liquidity among bank depositors often shoots up, putting major financial institutions under strain.

But it is not clear how digital currencies would perform in similar situations, he cautioned.

Decentralised virtual currencies like bitcoin operate as a payments system with no central bank and are exchanged using encryption.

"The 'currency' or asset at the centre of some of these 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," Mr Quarles said in prepared remarks.

CONCERNS FLAGGED

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.''

FED VICE-CHAIRMAN FOR SUPERVISION RANDAL QUARLES

"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."

That could create "a large challenge to the system", if digital currencies could not be predictably exchanged for the US dollar at a stable exchange rate in "times of adversity", he warned.

After breaking through the US$11,000 (S$14,818) level on Wednesday, only hours after hitting US$10,000 for the first time, bitcoin fell sharply and around 6pm GMT on Thursday (2am on Friday Singapore time), was trading at US$9,670.85, and had a total market value of about US$163 billion.

Amid the turbulent price fluctuations, the White House said Homeland Security Adviser Tom Bossert was monitoring the situation and had discussed it this week.

Nasdaq president and chief executive Adena Friedman tamped down news reports that her exchange is planning to launch bitcoin futures trading next year. She told CNBC on Thursday that the tech-heavy New York exchange was still considering its next move.

 

"We actually haven't announced anything," she said. "I would just say that we have been having active dialogue with a lot of clients and with partners about what might be possible over time."

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on December 02, 2017, with the headline 'Bitcoin 'could be threat to financial stability''. Print Edition | Subscribe