Nobel Winner Warns Central Bank Cryptos Would Court Catastrophe

Five Reasons 'Bitcoin Jesus' Loves the Digital Currency

Could a central bank solve cryptocurrency woes by issuing a “safe” version of its own?

Not so fast, says Bengt Holmstrom, a 2016 recipient of the Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Speaking at a seminar in Helsinki on Monday, Holmstrom said the very safety promised by a digital currency managed by a central bank would be its undoing.

“It’s a terrible idea because it’s great, so to speak, when it’s not needed and the times are good. But if there is a crisis,” that safety “is actually the prescription for bank runs,” said the 68-year economics professor from the Massachusetts Institute of Technology.

Read more on what the world’s central banks are saying about cryptocurrencies

In a crisis, the thinking goes, money would rush out of the banks and flood the central bank, which would suddenly find itself in the position of taking the role of market intermediary, though bereft of much of the information that banks possess. The central bank would then need to resolve the conundrum of how to inject the money back into the banking system.

“That’s an example of where you think you’re doing something good, you’re creating a lot of safety, but the consequences are actually potentially catastrophic,” Holmstrom said. “There’s always a trade off between the safety that you create and the calamity that comes when that safety is broken. The bigger the calamity, the more safety there was initially.”

    Before it's here, it's on the Bloomberg Terminal.