Central banks could soon be creating their own digital currencies

Central banks could soon be creating and managing their own digital currencies, according to Central Bank governor Philip Lane.

Mr Lane said the jury was still out on whether private digital currencies such as Bitcoin were forces for good or forces of instability.

“An interesting element of this debate is whether the future is going to be private-sector digital currencies or whether central banks will create and manage publicly-backed digital currencies,” he said.

Mr Lane was addressing the annual Financial Services Ireland lunch on the opportunities and risks posed by technological innovation in the financial services industry.

The impending “death of cash” and the rise of digital currencies, which reduce costs and make transactions faster, has become a major theme in financial services.

The new wave of currencies poses a challenge to the central bank’s traditional role as the guardian of its own currency.

Keeping abreast of the changing technological environment in financial services is “quite challenging”, Mr Lane said, noting that regulators must strike a balance between encouraging innovative companies while at the same time protecting consumers.

He said that the bank is responding to the challenge by committing significant resources to improve its data architectures and establish quantitative analytical teams for its banking, insurance and markets directorates.

Since the crash the financial services space has seen the entry of new players, in the peer-to-peer lending arena, such as LinkedFinance and the Grid, while new mortgage players such as Frank Money have also been seeking authorisation.

Outlining four primary challenges in the regulatory treatment of financial innovations, Mr Lane described the difficulties in relation to the authorisation of new firms.

“Regulators must strike the appropriate balance between encouraging innovation-related entry and ensuring that new firms are sufficiently ready to fulfil all regulatory obligations in relation to financial stability and consumer protection,” he said.

When supervising existing firms, regulators must make “measured judgement calls in relation to the shifting business models and the appropriate level of capital required to provide a buffer vis-à-vis the associated risks” Mr Lane said, adding that the increased scope for cross-border delivery of financial services “reinforces the importance of international regulatory harmonisation and cooperation, especially where home and host regulatory authorities have different supervisory responsibilities”.

Technological innovation may also alter the role of central banks in managing the money supply and acting as a lender of last resort, Mr Lane said, given the widespread adoption of private-sector digital currencies.