There is a “strong case” for authorities to rein in digital currencies because of their links to the established financial system, Bank for International Settlements General Manager Agustin Carstens said.
In his first major public speech as head of the Basel, Switzerland-based institution, Carstens argued that central banks — along with finance ministries, tax offices and financial market regulators — should police the “digital frontier.” He said they must ensure a level playing field and functioning payment systems, and safeguard the “real value” of money.
The value of cryptocurrencies soared in 2017 before slumping, with Bitcoin losing two-thirds of its value since mid-December. The biggest virtual currency sank 8 percent to $6,482 at 10:31 a.m. Frankfurt time, after earlier sliding to as low as $5,922, according to Bloomberg composite pricing.
“Bitcoin is not functional as a means of payment, but it relies on the oxygen provided by the connection to standard means of payments and trading apps that link users to conventional bank accounts,” Carstens said in Frankfurt on Tuesday. “If the only ‘business case’ is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.”
While cryptocurrency technology has the potential to reshape global finance, concerns have been raised about its volatility and the appeal to criminals. The BIS helps central banks pursue monetary and financial stability and Carstens, who took over late last year after leading Mexico’s central bank, joins a list of officials expressing reservations.
European Central Bank President Mario Draghi told European lawmakers on Monday evening that digital currencies should be seen as “very risky” unregulated assets, and that the bank-supervision arm of the ECB is studying whether euro-area lenders are too exposed.
At last month’s World Economic Forum in Davos, ECB Executive Board member Benoit Coeure urged Group of 20 nations to discuss ways to regulate Bitcoin at their March meeting, and U.K. Prime Minister Theresa May promised to consider clamping down.
In the U.S., Commodity Futures Trading Commission Chairman J. Christopher Giancarlo and Securities and Exchange Commission Chairman Jay Clayton will call attention to potentially dangerous gaps in rules for trading digital currencies when they appear on Tuesday at a Senate Banking Committee hearing, according to copies of their testimony obtained by Bloomberg.
ECB policy maker Yves Mersch will speak about digital currencies and their underlying technology at a lecture in London on Thursday.
The developers of cryptocurrencies portray them as immune to dilution by governments and central banks because the number of coins in circulation is fixed. Yet Carstens said the proliferation of spinoffs is effectively a modern-day equivalent of currency debasement.
While noting that many people don’t consider them to be a systemic threat because of their still-niche role, he warned that could change quickly.
“If authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat,” he said. “Most importantly, the meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust. Private digital tokens masquerading as currencies must not subvert this trust.”