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Bitcoin has become a combination of bubble, Ponzi scheme and environmental disaster: BIS chief

If central banks and financial authorities do not act pre-emptively, cryptocurrencies could become a threat to financial stability, Bank for International Settlements (BIS) General Manager Agustín Carstens said.

Speaking at the House of Finance, Goethe University, Carstens urged authorities to be prepare themselves to act against the expanding reach of cryptocurrencies in order to protect consumers and investors.

“To date, many judge that, given cryptocurrencies’ small size and limited interconnectedness, concerns about them do not rise to a systemic level. But if authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability,” he said.

Carstens explained that for money to keep its value, it must be backed by accountable institutions which enjoy public trust and highlighted the role that central banks have to play in this regard.

"The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust," Carstens said. "Private digital tokens masquerading as currencies must not subvert this trust."

He emphasized that while authorities must welcome innovation, they have a duty to ensure that technological advances are not used to legitimise profits from illegal activities.

"Novel technology is not the same as better technology or better economics," Carstens added. "That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster."

He outlined two aspects that require special attention from authorities – first, the ties linking cryptocurrencies to real currencies, to ensure that the relationship is not parasitic, and second, to ensure a level playing field for all participants in financial markets, access to legitimate banking and payment services should be limited to those exchanges and products that meet accepted high standards.

"This means 'same risk, same regulation'. And no exceptions allowed," he added.

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