Authorities must be prepared to act against the invasive spread of cryptocurrencies to protect consumers and investors, Bank for International Settlements (BIS) General Manager Agustín Carstens said.
In a lecture "Money in the digital age: what role for central banks?", Carstens said that for money to keep its value, it must be backed by accountable institutions which enjoy public trust. Here, central banks are key.
"The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust," Carstens said in the lecture in Frankfurt, organised by Sustainable Architecture for Finance in Europe (SAFE), the Center for Financial Studies and the Deutsche Bundesbank. "Private digital tokens masquerading as currencies must not subvert this trust."
New technologies hold great promise, for example in making payment systems more efficient. But new currencies are not required for that promise to be realised. Authorities have a duty to make sure technological advances are not used to legitimise the profits from illegal activities, and to educate and protect investors and consumers, Carstens said. They must also ensure cryptocurrencies do not become entrenched and pose a risk to financial stability.
"Novel technology is not the same as better technology or better economics," Carstens said.
"That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster."
Large price swings, high transaction costs and a lack of consumer and investor protection make cryptocurrencies unsafe and unsuited to fill money's role as a shared means of payment, store of value and unit of account, he said.
Central banks and financial authorities should pay particular attention to the ties linking cryptocurrencies to real currencies, and ensure they do not become parasites on the institutional infrastructure of the wider financial system. To ensure a level playing field for all participants in financial markets, access to legitimate banking and payment services should be limited to those exchanges and products that meet accepted high standards, Carstens said.
"This means 'same risk, same regulation'. And no exceptions allowed," he said.