Fed’s Quarles Discusses Implications of Cryptocurrency for Financial Stability

As financial innovation forges ahead and digital currencies like bitcoin continue to make headlines, Federal Reserve Vice Chairman for Supervision Randal Quarles today emphasized the need to balance innovation with financial stability. In remarks at a fintech conference in Washington, D.C., today, Quarles raised concerns about the effects cryptocurrencies could have on safety and soundness.

“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,” Quarles said. “Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the center of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress.”

Quarles noted that regulators and policymakers should exercise caution when considering whether to adopt a centralized digital currency system in the U.S. A government-backed cryptocurrency could introduce new money laundering, cyber and other risks into the financial system, and disrupt the private-sector, he explained. “For example, if payment activity radically shifted from using deposits at financial institutions to using a central-bank-issued digital currency, deposits could significantly shrink and potentially disrupt financial institutions’ ability to make loans that spur economic activity.”