Central bank cryptocurrencies could undermine system, watchdog warns 

If central banks ever issued their own cryptocurrencies, they could become rivals to cash, draining funds from the commercial banking system and accidentally driving up market interest rates, a global watchdog has warned.
Central banks including the Bank of England, the Swedish Riksbank and the US Federal Reserve have all commented on the idea in public, with the Riksbank actively investigating the implications of its own digital currency.
But there is no clear need for central banks to do this, according to the Bank of International Settlements - and it could instead create serious new risks for the financial system.
One risk is that in any crisis or period of strain in markets, money may flood out of banks and into the new cryptocurrency, if savers and investors view it as safe and backed by the central bank.
Central bank cryptocurrencies could undermine system, watchdog warns 

Bank of England Governor Mark Carney has been very critical of bitcoin, arguing it has "failed" as a currency, with no stability and a slow, expensive payments system

“Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations,” said the BIS report, written by groups of analysis chaired by Klaus Lober at the European Central Bank and Aerdt Houben of the Netherlands Bank.
It added that “introducing a central bank digital currency could result in a wider presence of central banks in financial systems", which could result in a "greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources".
The report said that this could move central banks "into uncharted territory" and may also "lead to greater political interference".
Another risk is that this extra competition would drive up costs for commercial banks.
“A general purpose [cryptocurrency] could compete with guaranteed bank deposits, with implications for the pricing and composition of banks’ funding,” the analysts warned.
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This could be particularly problematic in a recession or financial crisis, as savers could flood out of banks and into the new currency, forcing the institutions to hike interest rates on bank accounts to tempt customers back in - just as central banks try to cut interest rates to support the economy.
However, there could be some advantages to policymakers.
Currently it is hard for officials to cut interest rates to zero or below, in part because savers can take their money out of the bank and put it under the mattress.
But if a digital currency was widely adopted, it could allow central banks to charge negative interest rates more easily, leaving users with fewer opportunities to dodge the rate.
However, the BIS analysis believes there are few real problems with the current system and so little need for a new digital setup.
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Instead the new technologies behind bitcoin and the other cryptocurrencies should be seen as interesting new payment methods, said Mark Carney, the Governor of the Bank of England, who is also chair of the BIS global economy meeting and of the Financial Stability Board.
“Technological developments have raised questions about the feasibility and desirability of combining distributed ledger technology with the trust inherent in fiat currencies to create a central bank digital currency available to all,” he said.
“As set out in this report, the policy issues that this would raise, for central banks and society more generally, need careful consideration. A more immediate priority is how to use these new technologies to meet the current demand for fully reliable, real-time payments.”
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