Mark Carney has called to end the “anarchy” of cryptocurrencies being used for criminal activities and warned against viewing as them true currencies.
He said that cryptocurrencies, such as bitcoin, fail to store value, are difficult and expensive to use for purchases, and are no use as a unit of account – all of the usual definitions of a currency.
So far bitcoin has proven to be a “a global speculative mania” rather than a useful new invention, he said, warning it faces a “pretty brutal reckoning”.
In a detailed attack on the digital currencies, the Governor of the Bank of England said the fashionable assets “exhibited the classic hallmarks of bubbles” with soaring valuations “reliant in part on finding the greater fool.”
Bitcoin went through a huge bubble and bust over the past 12 months, rising in price from $1,000 at the start of 2017 to almost $20,000 in December before falling to roughly $10,000 now.
“It is not clear the extent to which they will ever become effective media of exchange,” Mr Carney said in a speech to the Scottish Economics Conference at Edinburgh University.
“Currently, no major high street or online retailer accepts Bitcoin as payment in the UK, and only a handful of the top 500 US online retailers do.
“For those who can find someone willing to accept payment for goods and services in cryptocurrencies, the speed and cost of the transaction varies but it is generally slower and more expensive than payments in sterling.”
Payments can take many hours to process, with fees hitting £40 late last year and currently hovering at around £2, he said, which is far in excess of the pennies paid for almost instantaneous sterling debit card transactions.
“Given that they are poor stores of value and inefficient and unreliable media of exchange, it is not surprising that there is little evidence of cryptocurrencies being used as units of account,” the Governor said.
“Retailers that quote in Bitcoin usually update at very high frequency so as to maintain stable prices in traditional currencies such as US dollars or sterling. The Bank is not aware of any business that accepts Bitcoins in payments that also maintains its accounts in Bitcoin.”
Those who dream of a world free from central banks and governments, where everyone uses digital currencies in fixed supply – since there is a limit on the number of bitcoins which can be created – have forgotten the lessons of history, he said.
“Far from being strengths, the fixed supply rules of cryptocurrencies such as Bitcoin are serious deficiencies. Fundamentally, they would impart a deflationary bias on the economy if such currencies were to be widely adopted,” Mr Carney warned.
“If ‘those who cannot remember the past are condemned to repeat it’, recreating a virtual global gold standard would be a criminal act of monetary amnesia.”
On top of that, the Governor is concerned that “one of the main reasons for their use is to shield illicit activities” and wants to take steps to end this “anarchy”.
“The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system,” he said.
“Being part of the financial system brings enormous privileges, but with them great responsibilities.”
That means working out how to classify the assets, regulate their sales, and push up standards – potentially as crypto derivatives are traded on regulated exchanges.
International regulators on the Financial Stability Board are studying this, and the Governor said it is a topic for the G20 meeting later this month.
Mr Carney said he would prefer “a series of national steps rather than a big coordinated approach.”
Cryptocurrencies “do not appear to pose material risks to financial stability” as they are still small relative to global GDP and are not relied upon by any financial institutions, he said.
But they could still pose risks.
If nothing is done and investors come to the belief that the authorities in some way condone the use of cryptocurrencies, then its volatility could undermine the wider sector.
“There is unease that the combination of these vulnerabilities and widening retail participation could damage the reputations of those financial intermediaries connected to crypto-asset markets,” Mr Carney said.
“In extreme circumstances, it could even undermine confidence in the broader financial system itself, particularly if people held an unfounded belief that authorities had legitimised these activities.”