Fed Cryptocurrencies, Suggests Banks As Solution

In a speech during the Financial Stability and Fintech Conference, Vice Chairman of Supervision, Randal K. Quarles made it clear that the Federal Reserve’s (Fed) position on cryptocurrencies is one of extreme caution. Instead, Quarles suggests that the government partner with current banking systems to create solutions in response to the digital payment wave.

The warning came as the regulator considered the possible implications of digital currencies during times of crisis. Recalling runs on major banks, and the reasons for founding the Federal Reserve, Quarles made it clear that the lack of supervision over cryptocurrencies should destabilize financial institutions. He said:

“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. Risk management can act as a mitigant, but if the central asset in a payment system cannot be predictably redeemed for the US 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.”

Fed with banks brings stability
Beyond just warning on decentralized digital currencies, the supervisor made clear that he would strongly caution against a governmental digital currency as well, noting that, should many users shift to such decentralized systems, banks may lose the necessary liquidity to loan money, make payments, etc.

Instead, he indicated that payment structures within the banking system have improved greatly from a technological perspective. Further, as the banks continue to seek out new innovation for improving payment methodology, the Fed would continue to partner with them to produce stability and safety. He said:

“Working cooperatively, private-sector participants and central banks can incorporate innovation that may be able to strike the right balance of improving the technical networks without adversely generating financial stability concerns.”