On November 30, 2017, the Federal Reserve Vice Chairman Randal K. Quarles addressed those convened at the 2017 Financial Stability and Fintech Conference.
He noted that the financial industry should differentiate between the digital currency assets growing in popularity among marketgoers, and the blockchain technology supporting those assets. He said, "Those technologies, such as distributed ledgers, may offer useful new ways to store, transfer, and protect data and traditional financial assets."
During his payment system-themed speech, Quarles acknowledged that new technologies have had a tremendous and positive impact on both living standards and economic growth.
Quarles pointed out that industry incumbents are going beyond initial pilot tests and moving forward with the limited application of blockchain-based platforms in production environments. He said that the "cautious approach" to blockchain technology reflects "the weight of responsibility the financial industry bears for protecting both their customers and their reputations," and he called for "continued monitoring" to discern how new technology may offer solutions for securing payment systems.
Although Quarles does not perceive cryptocurrency adoption as representative of any immediate disruption, he related that, especially during a crisis, "more serious financial stability issues may result if they achieve wide-scale usage ... During times of crisis, the demand for liquidity can increase significantly, including the demand for the central asset used in settling payments."
Given the perceived lack of a “central” asset underlying the value of cryptocurrencies, Quarles scrutinized their ability to mitigate liquidity and credit risk via contemporary risk management practices. "Without the backing of a central bank asset and institutional support," said Quarles, "it is not clear how a private digital currency at the center of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress."
Bringing up a topic grappled with by central banks in Russia and China, Quarles also touched on the prospect of a centralized cryptocurrency issued by banks, which he described "as a 21st century analogue to paper currency."
On central bank-issued cryptocurrencies, he warned, "I would urge caution, particularly for countries like the United States with highly developed banking systems and ongoing robust demand for physical cash."
Quarles elaborated on his concerns:
"As a practical matter, I believe that consideration of a central-bank-issued digital currency to the general public would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy to name a few."
Quarles also asserted that the development of a globally held central-bank-issued digital currency might result in an increase in cyberattacks. In addition, he suggested that such a cryptocurrency could be used in illicit financing and money laundering.
In the immediate future, Quarles suggests that rather than issuing a US cryptocurrency, "Instead, the near-term alternative is to build on the trusted foundations of the existing payment system and work to improve private-sector payment services. Importantly, this means looking to the banking system, which holds the bulk of the transaction deposits in this country, to improve services."
It may be true that federally insured financial houses are, as Quarles puts it, "the core of our current payment system." Still, Quarles holds optimism for integrating new technologies within the financial sector.
"Leveraging our existing banking system does not suggest that there is no room for new or emerging institutions and technologies. Indeed, there are a number of promising avenues that would allow the innovations that appear to be of the greatest interest to households and business--attributes like instant payment capabilities and around-the-clock operations--to be offered using a variety of existing and new technologies without requiring significant tradeoffs in safety and resiliency."