Jens Weidmann, the head of Germany’s Bundesbank and one of the most powerful figures in European finance, has warned that digital currencies like bitcoin have the potential to make financial crises in the future even more devastating.
Speaking in Frankfurt on Wednesday, Weidmann said he believes that central banks will eventually create their own digital currencies to reassure average citizens that such currencies are safe and stable, but in doing so could increase the risk of bank runs in future crises.
“Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent,” Weidmann said in a speech largely focused on the European Central Bank’s QE programme.
“This is a 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.”
Weidmann’s basic point is that by making currencies fully digital in future, withdrawing money from a bank would become much more simple. Instead of physically having to visit a cashpoint or bank branch to withdraw cash, customers could do it online. In times of crisis, when people tend to take money out of their accounts so they can have the perceived safety of cash, causing the phenomenon of the bank run.
At its simplest level, a bank run occurs when customers lose faith in the stability of the bank and the safety of their money, so decide to take out their cash. This, in turn, makes the bank’s problems even worse, because they lose cash liquidity, making it more difficult for them to fulfil their obligations.
A famous example of a bank run came in 2007 when British lender Northern Rock saw a run after it was revealed that it had to seek emergency assistance from the Bank of England. Northern Rock collapsed shortly afterwards.
Digital currencies have hit the headlines in recent months after the price of bitcoin — the best-known cryptocurrency — began to increase rapidly.
Bitcoin’s price has climbed from around $US750 per coin in late 2016 to around $US3,000 per coin today, a gain of 400% in just over six months. That has caused other currencies like Ether to spike higher as well.
Get the latest Bitcoin price here.
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