BIS warns on risks of embracing digital currencies

Central banks have raised concern about the cyber-resilience of digital currencies like bitcoin.

The BIS says the risks associated with cryptocurrencies are ‘hard to assess’.

Central banks have raised concern about the cyber-resilience of digital currencies like bitcoin amid continuing discussion about the possible emergence of central bank cryptocurrencies.

According to the Bank for International Settlements, new cryptocurrencies are emerging almost daily, with many observers wondering if central banks should issue their own versions.

Already, some central banks have been experimenting with distributed ledger technology — the technology that underlies bitcoin.

“But making sense of all this is difficult,” the BIS says.

“There is confusion over what these currencies are, and discussions often occur without a common understanding of what is actually being proposed.”

The BIS says a central bank cryptocurrency would allow consumers to hold bank liabilities in a digital form.

Bitcoin is up $US 244

However, it notes that this would also be possible if the public were allowed to have central bank accounts — an idea that’s been around for a long time.

The issue of whether a central bank should offer a digital alternative to cash was most pressing in countries like Sweden, where cash usage was in rapid decline.

Consideration would have to be given not only to consumer preferences for privacy and possible efficiency gains in payments, clearing and settlement, but also to risks to the financial system and the wider economy, as well as any implications for monetary policy.

“Some of the risks are currently hard to assess,” the BIS says. “For instance, at present very little can be said about the cyber-resilience of central bank cryptocurrencies.”

Last week, JPMorgan Chase chief executive Jamie Dimon slammed bitcoin as a “fraud”, predicting it would blow up.

Mr Dimon’s commentary came amid a meteoric rise in bitcoin, with the value of the virtual currency surging fourfold since December to more than $US4000.

Cynicism surrounding bitcoin centres on its capacity to pay for goods and services while bypassing banks and the mainstream financial system. It is not backed by any government.

The JPMorgan chief said bitcoin wouldn’t work because “you can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart”.

He said he would dismiss any JPMorgan staffer trading in the digital currency.

“I would fire them in a second for two reasons: it is against our rules and they are stupid, and both are dangerous,” he said.

While mainstream banks have largely avoided bitcoin since it emerged after the financial crisis, it still has strong support in the tech sector, those seeking anonymity and speculators attracted to its massive price swings.

Distributed ledger technology, on the other hand, has gone mainstream, with venture capitalists and financial institutions investing heavily in projects that provide new financial services or offer old ones much more efficiently.

“Bloggers, central bankers and academics are predicting transformative or disruptive implications for payments, banks and the financial system at large,” the BIS says.

“Lately, central banks have entered the fray, with several announcing that they are exploring or experimenting with distributed ledger technology.”