Fed Vice Chair: Cryptocurrencies Threaten Financial Stability

Digital currencies may pose a threat to financial stability as they gain popularity, said U.S. Federal Reserve vice chairman for supervision Randal Quarles.

Speaking at the 2017 Financial Stability and Fintech Conference on Thursday, Quarles warned against the rise of cryptocurrencies, saying private decentralized currencies could have "spillover effects" on the broader financial system if they grow too big.

Their volatility, and the fact that they are not backed by any institution or physical assets, make them difficult to get a handle on, which means it is unclear what would happen in an emergency situation, he said.

During his speech, 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."

While Quarles warned against digital currencies, he explained that the note of caution reflected a lack of understanding as to how they would react to times of adversity, saying "it is not clear … whether the payment system would be able to function, in times of stress."

Fedcoin? Go slow

He also suggested "extensive reviews and consultations" before any central bank issues its own homegrown cryptocurrency, especially in nations where cash is prominently used.

Rolling out such currencies too quickly could also spook residents and lead to a drop in economic activity, Quarles warned. And deployment of "unproven technology" could potentially cause other issues.

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

He recommended further research into cryptocurrencies to establish use cases.

Randal Quarles image via C-SPAN