In a recent speech, Randal K. Quarles, Vice Chairman for Bank Supervision on the Federal Reserve Board of Governors, highlighted the complications associated with digital currencies, particularly as to how to treat and define them.

Quarles noted that the underlying blockchain technology could offer new ways to store, transfer, and protect data and traditional financial assets, and also underscored the efforts of the financial industry in this space. However, with regard to digital currencies, Quarles said:

“…the "currency" or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all. Indeed, how to treat and define this new asset is complicated.”

Furthermore, he said that while digital currencies do not pose major risks at their current usage levels, the scenario would change in case of their widespread use.

“Without the backing of a central bank asset and institutional support, 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,” he added.

Quarles also urged caution when considering Central-Bank-Issued Digital Currency (CBDC), particularly for countries such as the U.S. with highly developed banking systems and strong demand for physical cash. He highlighted the risks associated with unproven technology, money laundering, cybersecurity and terrorism financing, among others.

However, he emphasized that research into digital currencies should continue, including highly liquid and secure limited-purpose digital currencies for use as a settlement asset for wholesale payment systems. In conclusion, Quarles said:

“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. Central bank digital currencies are also not immune to a large range of risks and could even adversely affect financial stability. As such, central banks should tread cautiously as they contemplate issuing them. But this does not mean that we should avoid further innovation. 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.”