Authorites urged to react to Bitcoin bubble

The head of the Bank for International Settlements (BIS), the central bank of central banks, on Tuesday described Bitcoin as a speculative bubble and called on authorities to take action to protect confidence in the financial system.

While Bitcoin’s developers pursue their goal of developing an alternative system of payment with no government involvement, this crypto-currency “has become a combination of a bubble, a Ponzi scheme and an environmental disaster,” BIS General Manager Augustin Carstens warned in a lecture he delivered in Frankfurt.

He called on national authorities to be more vigilant because crypto-currencies can undermine public trust in the financial system. Like Bitcoin, crypto-currencies are really “purely speculative” assets with “very volatile” valuations, the central banker recalled.

Crypto-currencies benefitted last year from clemency from authorities as their technology offered an example to follow in reducing the high cost of financial transactions. However, given the way the value of Bitcoin – the queen of virtual currencies – shrank from a high of close to 20,000 dollars in December to less than half that amount these days, with high daily fluctuations, regulators have become more critical. China, for example, plans to strengthen its monitoring of crypto-currencies and crack down on transactions done in the country.

According to Carstens, the crypto-currencies’ volatility undermines their usefulness for transactions and as a store of value, while paving the way for their use as conduits for criminals to launder dirty money.

If the only model of activity is their use for illicit or illegal transactions, central banks cannot allow these digital coins to piggy-back on the same infrastructure that serves the global financial system and the trust it provides, Carstens warned. That’s why, he said, central banks must “be prepared to intervene if necessary”.

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