Bitcoin could threaten financial stability: Fed governor

WASHINGTON: Digital currencies like bitcoin could pose a threat to financial stability as they gain wider use, a chief Federal Reserve banking oversight official said.

The remarks from newly-installed Fed vice chairman for Supervision Randal Quarles came as bitcoin took a vertiginous dive on Thursday after skyrocketing earlier in the week to more than 10 times its value at the start of the year.

Bitcoin is increasingly being embraced by Wall Street, with plans by mainstream markets to offer trading in the currency’s futures, which is drawing interest and some concern from regulators.

Quarles raised concerns about how cryptocurrencies would behave in a crisis.

In a speech on the payments system he said that in times of crisis, demand for liquidity among bank depositors often shoots up, putting major financial institutions under strain.

But it is not clear how digital currencies would perform in similar situations, he cautioned.

Decentralised virtual currencies like bitcoin operate as a payments system with no central bank and are exchanged using encryption.

“The ‘currency’ or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all,” Quarles said in prepared remarks.

“While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.”