BIS Wants Central Banks at Center of Digital Cash Revolution

(Bloomberg) -- Central banks must embrace the revolution under way in digital money to ensure they remain at the heart of the global payments system, according to the head of the Bank of International Settlements.

Agustin Carstens's argument is that while the private sector “excels at customer-facing activity,” central banks provide the basis for trust, ensure liquidity and set standards. He's unenthusiastic about Bitcoin and worried that big tech companies like Facebook offering payment services means they could become unfairly dominant because of their existing data resources.

“We have a responsibility to be at the cutting edge of the debate,” the BIS general manager said in a speech on Thursday. “There is really no choice but to do so, as otherwise events will overtake us.”

Carstens, who kicked off his BIS term urging authorities to rein in digital currencies, has since overseen the implementation of a hub to foster collaboration in financial technology. But his caution is clear, and he warns that people shouldn't be blinded by shiny new things at the expense of stability in the financial system.

“A gleaming skyscraper is an awesome sight. But when we admire one, we often overlook its foundations. These are out of sight, below ground level. But just because they are not visible, it does not mean that they don't matter. On the contrary, they matter a lot.”

In his speech at Princeton University, Carstens addressed central bank issued digital currencies. While institutions are looking into the idea, caution still rules. Speaking in the European Parliament this week, ECB President Christine Lagarde said it's “an area where we have to rush slowly,” noting risks for customer security and financial stability.

On Thursday, U.S. Treasury Secretary Steven Mnuchin said he and Federal Reserve Chairman Jerome Powell don't expect the U.S. to create a digital currency in the near future. On Facebook's Libra, he said he's fine with the idea, but it must be “fully compliant” with bank secrecy and anti-money laundering rules.

Carstens gave a green light to wholesale CBDCs, as they're known, because they'd be restricted to institutions that already have access to central bank deposits, adding that issuing them to the general public is perilous.

“Imagine if anybody could open an account at the central bank” he said. “In extreme cases, the central bank could become the one-stop banker for almost everybody in the economy,” which would constitute a “daunting” risk.

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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