By Huw Jones
LONDON (Reuters) - Central banks should think hard about potential risks and spillovers before issuing their own cryptocurrency, the Bank for International Settlements (BIS) said in a report on Monday.
The report by two committees at the BIS, a forum whose members include the U.S. Federal Reserve and European Central Bank, is wary of central banks issuing their own central bank digital currency, or CBDC.
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"There are risks we do not fully understand at this point," said Jacqueline Loh, chair of the BIS markets committee.
"Any step towards a possible launch of a CBDC should be subject to careful and thorough consideration," added Loh, who is also deputy managing director of the Monetary Authority of Singapore.
The report looks at the possible impact of a "wholesale" digital currency only for a limited audience like banks, and a "retail" version for all.
Benoit Coeure, who chairs the BIS committee on payments and market infrastructure, said there was more caution with the "uncharted waters" of a retail CBDC.
It could impact deposits, a major source of funding for commercial banks, with implications for financial stability in times of market stress, the report said.
There was no evidence that digital currencies would allow central banks to implement monetary policy better than with tools they already have.
No bank has issued a digital currency, though the Riksbank in Sweden, where the use of cash has fallen, is studying a retail e-krona for small payments. It said last month its study won't be finalised until late 2019, later than initially indicated.
The BIS report said blockchain or the distributed ledger technology (DLT) that underpins cryptocurrencies, could make settling trades of securities and forex more efficient.
"DLT is where the action is," said Coeure, who is also an ECB executive board member.
Bank of England Governor Mark Carney said that while a CBDC needed careful consideration, a more immediate priority is how to use the new technologies to meet the current demand for fully reliable, real-time payments.
NO CONCRETE ACTION
The BIS report comes at a time when privately issued cryptocurrencies like Bitcoin have seen huge price swings to trigger stark investor warnings from regulators.
This has not crimped the sector's enthusiasm, however.
CaskCoin launched on Monday the "first" cryptocurrency that gives investors a chance to own a share in a 40 million pound portfolio of "world class" whisky stored in a Scottish warehouse.
The BIS report is timed to inform discussion among central bankers and finance ministers from the Group of 20 Economies (G20). They meet in Buenos Aires early next week to discuss if new regulation is needed for private cryptocurrencies.
The Financial Stability Board, the G20's regulatory watchdog headed by Carney, will report on the private cryptocurrencies.
"It's clearly a learning curve and regulators across the world have addressed what are the immediate risks created by private digital tokens," Coeure said.
Investor protection along with anti-money laundering and terrorist financing safeguards are the priority, while consideration of cryptocurrencies' underlying and futures markets would come later, Coeure said.
"So any discussion in the G20 next week will be likely to be forward looking, discussing the pros and cons of regulation, but don't expect concrete action, it's more about comparing experiences so far," Coeure said.
(Additional reporting by Daniel Dickson in Stockholm; Editing by Matthew Mpoke Bigg)