Nobel winner warns of catastrophe if central banks issue their own cryptocurrencies

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,” the 68-year economics professor from the Massachusetts Institute of Technology

“But if there is a crisis [then safety] is actually the prescription for bank runs.”

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.