Bundesbank’s Weidmann warns of digital currency risks

Germany’s top central banker has warned of the dangers from digital currencies, saying that their creation could worsen financial crises. Speaking in Frankfurt on Wednesday, Jens Weidmann, the Bundesbank’s president, acknowledged the creation of an official digital currency by a central bank would assure the public that their money was safe.

However, he warned that this could come at the expense of private banks’ ability to survive financial panics.

The global financial crises has triggered the creation of a glut of unofficial digital currencies such as bitcoin. Dealing with the consequences of this shift towards digitalisation, the Bundesbank president predicted, would be the main challenge faced by central banks.

Central banks have also been called on to create distinct official digital currencies to challenge the popularity of unofficial digital currencies and allow citizens to bypass private sector lenders. Mr Weidmann said:

Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent. This is an feature which will become relevant especially in times of crisis – when there will be a strong incentive for money holders to switch bank deposits into the official digital currency simply at the push of a button. But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.

In creating the conditions for a run on bank deposits, lenders would be short of liquidity and struggle to make loans.

“My personal take on this is that central banks should strive to make existing payment systems more efficient and still faster than they already are – instant payment is the buzzword here,” the Bundesbank president said.

“I am pretty confident that this will reduce most citizens’ interest in digital currencies.”