Quarles warns on central banks issuing digital currencies, but research into settlement should continue

Excerpt of speech by Vice Chairman for Supervision Randal Quarles at the 2017 Financial Stability and Fintech Conference sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the University of Maryland’s Robert H. Smith School of Business, Washington, D.C.

Central-Bank-Issued Digital Currency

Given that privately developed digital currencies may raise important financial stability issues tied to the value of the asset, some have argued that central banks should begin to issue their own digital currency as a 21st century analogue to paper currency. I would urge caution, particularly for countries like the United States with highly developed banking systems and ongoing robust demand for physical cash.

As a practical matter, I believe that consideration of a central-bank-issued digital currency to the general public would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy to name a few. I am particularly concerned 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. The prospect of a government-sponsored digital currency might even derail private-sector plans to enhance the payment services provided to their customers, thereby significantly disrupting the financial networks that exist today in ways that could create instability. For example, if payment activity radically shifted from using deposits at financial institutions to using central-bank-issued digital currency, deposits could significantly shrink and potentially disrupt financial institutions’ ability to make loans that spur economic activity.

That said, research into digital currency issues, including highly liquid and secure limited-purpose digital currencies for use as a settlement asset for wholesale payment systems, should continue. As technologies are developed and refined, old issues are resolved and new issues arise. Other countries may have different environments and experiences. We should always be open to learning and understanding from the experiences of others.

Read the full speech

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