By Andy Bruce
LONDON (Reuters) – Bank of England Governor Mark Carney sees “fundamental problems” with the idea of a digital currency issued by a central bank that could be used by the general public.
The emergence of bitcoin and other cryptocurrencies has led some economists to predict the technology could be used one day across entire economies, with digital currencies created by central banks.
Carney told British lawmakers in Parliament on Wednesday that the blockchain technology used in cryptocurrencies conceivably could improve the way transactions are conducted between financial institutions.
But there could be financial stability risks if such an approach were rolled out across the whole economy through a cryptocurrency intended for the general public, he said.
Central banks already use electronic money – only a small proportion of their assets are now backed by gold – but this is exchanged in a centralised fashion, across accounts at the central bank.
Cryptocurrencies allow parties to transact payments directly without a central intermediary, by means of blockchain technology that uses a shared ledger that verifies, records and settles transactions in a matter of minutes.
With no need for a central intermediary to facilitate and track transactions, consumers holding central bank-issued cryptocurrency could open accounts at any bank, including the central bank.
“You (could) create a situation where you can have an instantaneous (bank) run. So as soon as there were any concern, people can switch in their account at the Bank of England,” Carney said.
That could also cause the BoE to accumulate huge volumes of deposits that it would need to invest into different assets.
“There are many talents of the Bank of England, but I think credit allocation across the entire economy would not be a good idea,” he said. “So there are some fundamental problems if you push the retail design all the way down, unless you restrict the amount that people have.”
In September, the Bank for International Settlements said it was too soon to determine whether central banks should issue their own cryptocurrencies.
It concluded that the peer-to-peer nature of the technology meant that a cryptocurrency for consumers could enable the anonymity that cash currently provides. But if that were not considered important, it said, it was unclear what further benefits it could provide.
BoE chief economist Andy Haldane in 2015 floated the idea of abolishing physical cash and introducing a state-run digital currency as a way to give more muscle to central banks that cut interest rates below zero to boost their economies.
BITCOIN? NO BIGGIE
Carney on Wednesday repeated the BoE’s view that sharp moves in the value of bitcoin did not present a threat to global financial stability.
Earlier on Wednesday, bitcoin fell more than 10 percent to a one-week low of $15,800 at cryptocurrency exchange Bitstamp <BTC=BTSP>, losing almost a fifth of its value from a peak reached just three days ago.
“At present, we don’t view it as a financial stability issue,” Carney said, adding that the combined value of bitcoin and other cryptocurrencies was around half the market capitalisation of Apple Inc <APPL.O>.
“So it’s significant … but it’s more like an equity-type risk that’s spread fairly widely around the world.”
(Additional reporting by David Milliken; Editing by Catherine Evans, Larry King)