Bank for International Settlements General Manager: Central Bank Digital Currencies Can Create Financial Instability

One of the most hardcore Bitcoin critics, Agustin Carstens, general manager at the Bank for International Settlements (BIS), recently expressed his views regarding the number of risks associated with central banks issuing their own digital currencies. Opposing the idea of central banks issuing their own virtual tokens better known as “central bank digital currency” (CBDC), he said that it could create a great level of financial instability and a threat to current monetary policy-making.

Recently, IBM announced that they have signed six international banks to launch their own stablecoins on IBM Blockchain World Wire. One of the investment banking giants JPMorgan Chase has also announced their own digital token called JPM Coin. combining all of that, it seems like the trend of issuing banks’ own digital tokens is picking up the pace and will soon become prevalent. According to Carstens, a central bank-issued digital currency could be a great potential risk to the current banking system.

Agustin Carstens is known for playing his role as stern Bitcoin fault finder over the years; in fact, he compared Bitcoin to “a bubble, a Ponzi scheme, and an environmental disaster.” Giving a speech in Dublin on Friday he cited some of the potential threads that CBDC could bring to the current banking infrastructure.

Explaining the risks, he said that in case of financial panic, a central bank-issued digital currency might lead the people to move their money from central banks to a monetary authority and erode the base of the current system. Talking about other risks, he said that potential changes to how interest rates affect the public’s demand for money can lead the bigger central banks towards accumulating their assets. This may further impact the financial market liquidity.

In the speech that was given at the Central Bank of Ireland, the general manager noted:

“There are huge operational consequences for central banks in implementing monetary policy and implications for the stability of the financial system. Central banks do not put a brake on innovations just for the sake of it. But neither should they speed ahead disregarding all traffic conditions.”

The increasing popularity of cryptocurrencies and sharp fall in use of cash as a medium of exchange in countries such as Sweden has created a dilemma about whether or not central banks should start offering digital tokens for the public along with their existing offers of banknotes.

Regulators and officials are exploring this area with extreme care, which made the progress quite slow. Moreover, a report of the Bank for International Settlements says that there are only a few central banks that are expecting to launch their own digital tokens in the upcoming years; yet, it is important to note that this report is from January, and the crypto world is incredibly volatile and constantly changing.

Carstens’ warning adds up to another recent cautionary message of a different banking authority against crypto. The Basel Committee on Banking Supervision (BCBS) has warned just a couple of weeks ago that the growth of cryptocurrencies can become a potential threat to global financial stability and banks.