The Bank for International Settlements (BIS), often known as the central banks’ central bank, has warned that financial institutions can’t ignore cryptocurrencies like bitcoin.

In its latest quarterly report, the bank has said that the world’s central banks need to realise the risk cryptocurrencies could pose to the stability of the financial system.

This comes the week after China’s central bank began its crackdown on digital currencies, ordering the country’s bitcoin exchanges to stop trading. The country’s government reportedly sees bitcoin as a threat to its domestic currency, the yuan.

This caused the price of bitcoin to fall from highs of nearly $5,000 to $3,395 on Friday.

Weighing up the pros and cons of cryptocurrencies   

Instead of ordering central banks to simply shut down cryptocurrencies a la China, the BIS has said that institutions need to assess how digital currencies will work within their jurisdiction.

It said there could be benefits to using digital currencies, such as to increase efficiency and reduce costs in the settlement of securities. This was something Germany’s Deutsche Bundesbank and Deutsche Borse explored with a dedicated digital payments platform.

However, it did warn of the risks associated with cryptocurrencies.

The BIS said:

“Central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing and settlements – but also the risks it may entail for the financial system, the wider economy, as well as any implications for monetary policy.”

These are issues countries, such as Sweden, are exploring at the moment. The demand for cash has fallen so much in the country that its central bank, the Riksbank, is exploring the idea of its own digital currency, the eKrona.

The BIS warned against this complete abandonment of cash in favour of digital currencies.

“Will the payment system continue to be safe and efficient without cash? Even if cash is not used every day, it is a backup option in crisis situations. Will those without access to bank services still be able to use it to manage their payments?”

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Are other central banks considering digital currencies?

The Bank of England is undertaking a multi-year research programme into the implications of issuing a digital currency.

Other countries such as Ecuador, Tunisia and Senegal have already issued their own digital currencies, with Estonia also considering its own project.

Whilst it’s interesting that banks are exploring this technology, due to the still unknown impact of digital currencies, it will likely be a long time before crypto coins completely replace cash in society.