Bitcoin Could Pose Financial Stability Risks – US Fed Vice Chair

News, Regulation | December 1, 2017 By:

US Federal Reserve vice chairman for supervision Randal Quarles has warned that bitcoin and other digital currencies could pose greater danger to the financial system as they gain wider use.

Speaking at the 2017 Financial Stability and Fintech Conference, Quarles said that digital currencies are a niche product that sometimes garners large headlines. He added that 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,” said Quarles.

The comments came after bitcoin prices plunged after a massive rally. Bitcoin was up to $11,300 at one point, then down to $8,500, then back up over $10,000. As of the time of writing, it sits at $10,055 per single coin.

Digital currencies like bitcoin operate as a payments system with no central bank. Quarles said that digital currencies are 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.

New York Fed President William Dudley recently said that the central bank has begun thinking about its own digital currency, though he added that it’s premature to make any moves.

Quarles dismissed the idea saying that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing.

“The effect of all this would significantly divert our focus from work to improve or establish new private-sector retail payment systems based on existing institutions,” he added.

Randal Quarles was confirmed as Federal Reserve Board member and vice chair for bank supervision in October of this year. Previously he was founder and head of The Cynosure Group, a private investment firm, and a former partner of The Carlyle Group, one of the world’s largest private equity firms. From August 2001 until October 2006, he held several important financial policy posts in the George W. Bush administration, ultimately serving as Under Secretary of the Treasury for Domestic Finance.