Mark Carney has warned that the adoption of digital currencies in the wake of bitcoin’s popularity raises the risk of an “instantaneous run” on lenders, threatening financial stability.
In moments of panic, the speed of virtual currency transactions could be a downfall, as it would make it easier for bank account holders to take out their deposits – converting them to digital currencies rather than physical banknotes – during a period of financial panic.
“If you have a retail central bank digital currency – so in other words a currency that allows any of us and everyone across the country to have an account at the Bank of England, as well as to have an account with other banks – you create a situation where you can have an instantaneous run,” Bank Governor Carney told MPs during a Treasury Select Committee hearing on Wednesday.
Without restrictions on the size and frequency of virtual currency transactions, the financial system could be put at risk if sentiment sours.
“As soon as there were any concern, people can switch into their account at the Bank of England. That’s the first issue, that’s the financial stability issue,” Mr Carney explained
The Governor was echoing concerns aired by by his counterpart at the Reserve Bank of Australia Philip Lowe earlier this month, who said he does not “currently see a publicly policy case” for digital currency adoption.
“It might be easier to run on the banking system. This could have adverse implications for financial stability,” Mr Lowe said.
But while Mr Carney admitted there are “fundamental” problems with running a system that involves everyday digital currency transactions, if managed properly, financial stability could actually be strengthened by their adoption.
Mr Carney said there was an argument for restricting their use for large transactions like real estate and home buying, which could take far less time to be cleared, becoming “more instantaneous”.
“You actually get financial stability benefits and you save huge amounts of computational intensity, energy intensity, transactional challenges that are there.”
The Governor said he could not give a timeline of when the Bank of England might issue its own digital currency, but said they have “dedicated, consistently, resources to this”.
“It’s an active area of interest,” he added.
Commercial lenders and central banks alike have already started exploring the potential of technology that underpins cyrptocurrencies like bitcoin, more commonly known as the blockchain or distributed ledger technology.
It is being seen as an opportunity to strip costs, speed up transactions and serving as a central ledge to track and verify transactions that cuts out the industry’s middlemen.
Just last week, the Financial Conduct Authority said it was was continuing to monitor edger-related market developments and is keeping its rules and guidance “under review in light of those developments”.