Fed vice chairman urges private issuer, central bank cooperation in developing digital currencies

Private issuers of digital currencies raise concerns about their effect on financial stability, and central banks should “tread cautiously” about issuing their own – for the same concerns – the newest member of the Federal Reserve Board said Thursday.

However, Fed Vice Chairman for Supervision Randal K. Quarles said both private issuers and central banks may be able to “strike the right balance” of improving technical networks for delivering digital currencies, without adversely affecting financial stability.

Quarles (who was sworn into his position at the Fed Nov. 6) was speaking in Washington a the 2017 Financial Stability and Fintech Conference sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the University of Maryland’s Robert H. Smith School of Business. In his remarks, he acknowledged that development of digital currencies, and other technologies, “will likely have a long-run effect on the technical networks and the business processes used in the payment system and the wider financial system.”

“Privately developed digital currencies as currently configured would raise concerns about the effect on financial stability if they take on more prominence in the payments and overall financial system,” Quarles said. “Central bank digital currencies are also not immune to a large range of risks and could even adversely affect financial stability.”

But in either case, Quarles said, there is no reason there cannot be further innovation in digitial currencies. “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,” he said.

Innovation in payment systems overall, the Fed vice chairman said, should follow a prudent approach, since a tension between innovation and the need for financial stability in the overall payment system can exist. “Innovation must therefore account for the effects that it has on both the financial and technology networks that make up our payment system,” he said.

Vice Chairman for Supervision Randal K. Quarles: “Thoughts on Prudent Innovation in the Payment System”