Cryptocurrencies are failing as a form of money and have shown classic signs of being a financial bubble, requiring regulators to protect consumers and stop their use for illegal activities, Bank of England Governor Mark Carney said on Friday.
Carney did not call for a ban on cryptocurrencies such as Bitcoin – and said the underlying technology had some promising applications. But they needed to be regulated in a similar way to other parts of the financial system, and could not replace traditional currencies.
“Cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing,” Carney said in a speech in London.
Bitcoin, the best known cryptocurrency, rose in value from around $1,000 at the start of 2017 to almost $20,000 in mid December, before tumbling below $6,000 last month and then staging a partial recovery.
Carney, who heads the G20 Financial Stability Board (FSB), a global rule-making body, expressed doubts about cryptocurrencies earlier this year and his speech, intended for a Scottish student economics conference, expanded on these.
“Crypto-assets raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions,” he said.
Finance ministers and central bankers from the G20 group of major world economies are due to meet in Buenos Aires in two weeks’ time, and cryptocurrencies is likely to be on the agenda.
However, Carney said different countries were likely to go in different directions on regulation, and a unified approach was unlikely from the FSB for some time.
China has recently banned financial institutions from handling them – an approach which Carney said risked foregoing potentially major opportunities which the underlying technology offers to streamline payments systems.
Bitcoin was partly a“Ponzi scheme”, the head of the Bank for International Settlements, Agustin Carstens, said last month.
Carney said that for now, cryptocurrencies posed little financial stability risk to Britain, due mostly to large banks’ limited involvement. But for individual investors, they were a danger.
“Many cryptocurrencies have exhibited the classic hallmarks of bubbles including new paradigm justifications, broadening retail enthusiasm and extrapolative price expectations reliant in part on finding the greater fool,” he said.
Many investors in crypto-currencies were from a generation that did not have first-hand experience of the 2008 financial crisis, he added.
However, the distributed-ledger technology underlying cryptocurrencies did have potential for improving cash settlement in the banking system and other asset transactions, he added.
“Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions,” Carney said.
Distributed-ledger technology could also be used for tax and medical records, and business supply chains, though a central bank operated digital currency.
Carney delivered the speech at Bloomberg’s London office, with a video link to Edinburgh, after heavy snow prevented him from delivering the speech as planned in the Scottish capital.