Cryptocurrencies Jeopardizes Financial Stability, Says Fed Vice Chairman

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Cryptocurrencies may endanger financial stability as they gain popularity, says U.S. Federal Reserve vice chairman for supervision Randal Quarles.
Quarles was speaking at the 2017 Financial Stability and Fintech Conference where he warned against the rise of cryptocurrencies.

He said private decentralized currencies could have "spillover effects" on the broader financial system if they grow too big.

Their instability, and the fact that they are not backed by any institution or physical assets, make them hard to get a grip on.

This means it is vague what would happen in an emergency situation, he said.

"Risk management can act as a mitigant, but if the central asset in a payment system cannot be predictably redeemed for the U.S. dollar at a stable exchange rate in times of adversity, the resulting price risk and potential liquidity and credit risk pose a large challenge for the system," Quarles said.

While Quarles cautioned against digital currencies, he clarified that the note of caution reflected a lack of understanding.

This was more especially during times of crisis as to how they would react to times of adversity.

He said: "it is not clear … whether the payment system would be able to function, in times of stress."

He also suggested "extensive reviews and consultations" before any central bank issues its own homegrown cryptocurrency.

This rings true in nations where cash is prominently used.

Delivering such currencies too fast could also spook residents and lead to a drop in economic activity, he said.

Deployment of "unproven technology" could also potentially lead to more problems.

While Quarles is cautious of using cryptocurrencies as any sort of federal monetary system, he supports the idea of using digital currencies as "secure limited-purpose" tools for settlement processes.

He recommended more research into cryptocurrencies to establish use cases.
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