Cryptocurrencies have hit the headlines in latest months after the price of bitcoin, one of the most popular cryptocurrency in the world, started to grow. The price of Bitcoin has climbed from almost $750 per one Bitcoin in 2016 to nearly $3,000 nowadays, a gain of four hundred percent in just over six months. That has led different currencies like Ethereum to spike higher too.
Jens Weidmann, the head of Germany’s Bundesbank, has warned that cryptocurrencies as bitcoin have the ability to make economic crises within the future even more devastating. Jens Weidmann noted that central banks would subsequently create their personal cryptocurrencies to reassure average residents that such currencies are secure and strong, but in doing so might raise the danger of bank runs in future crises.
Jens Weidmann said:
“Permitting the public to hold claims on the central bank might make their liquid assets more secure, as a central bank can’t become bankrupt. This is a characteristic, which will become relevant particularly in times of crisis, while there may be a sturdy incentive for money holders to switch bank deposits into the legitimate cryptocurrency actually at the push of a button. However, what could be a boon for savers searching for protection could be a bane for banks, as this makes a bank run doubtlessly even less complicated.”
Jens Weidmann suppose that by making currencies absolutely virtual in future, withdrawing cash from a bank could become more easy. Instead of having to visit a cashpoint or financial institution department to withdraw money, clients might do it through the internet. In times of crisis, whilst people tend to take cash out of their accounts in order to have the perceived protection of money, causing the phenomenon of the bank run.
However, a bank run happens when clients lose faith in the stability of the financial institution and the protection of their cash, so decide to take out their money. This, makes the bank’s issues even worse, as they lose money liquidity, making it tougher for them to fulfil their obligations. A well-known example of a bank run happened in 2007 when British lender Northern Rock saw a run after it was found out that it needed to seek emergency help from the bank of England. Northern Rock collapsed rapidly afterwards.