Agustin Carstens, head of the Bank for International Settlements (BIS), has warned that central banks must be prepared to act against cryptocurrencies to ensure they do not become entrenched and undermine trust in central banks.
The BIS is an international financial institution owned by central banks which “fosters international monetary and financial cooperation and serves as a bank for central banks.” It carries out its work through its meetings, programs and through the Basel Process – hosting international groups pursuing global financial stability and facilitating their interaction.
During a speech in Frankfurt, Germany, Carstens described bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”, with his last point in reference to the energy consumption required for mining the cryptocurrency.
“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,” he said. “The volatility of bitcoin renders it a poor means of payment and a crazy way to store value.”
Carstens, a former governor of Mexico’s central bank, said the current fascination with cryptocurrencies seemed to have more to do with “speculative mania” and that their only true function appeared to relate to illegal activities.
“It is alarming that some banks have advertised ‘bitcoin ATMs’ where you can buy or sell bitcoins,” he said. “If the only ‘business case’ is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.”
Carstens called on authorities to clamp down on the technology to stop them “piggybacking” on mainstream institutions and becoming a “threat to financial stability.”
“To date, many judge that, given cryptocurrencies’ small size and limited interconnectedness, concerns about them do not rise to a systemic level,” said Carstens. “But if authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability.”
Carstens’ remarks came after European Central Bank president Mario Draghi warned that cryptocurrencies were “very risky assets” and said that the ECB’s bank supervision arm was working “to identify potential prudential risks that these digital assets could pose to supervised institutions.”