A chief Federal Reserve banking oversight official has said that digital currencies like bitcoin could pose a threat to financial stability as they gain wider use.
The remarks from Fed Vice Chairman for Supervision Randal Quarles came as bitcoin took a vertiginous dive yesterday after skyrocketing earlier in the week to more than 10 times its value at the start of the year.
Bitcoin is increasingly being embraced by Wall Street, with plans by mainstream markets to offer trading in the currency's futures, which is drawing interest and some concern from regulators.
Quarles raised concerns about how cryptocurrencies would behave in a crisis.
In a speech on the payments system he said that in times of crisis, demand for liquidity among bank depositors often shoots up, putting major financial institutions under strain.
But it is not clear how digital currencies would perform in similar situations, he cautioned.
Decentralised virtual currencies like bitcoin operate as a payments system with no central bank and are exchanged using encryption.
"The 'currency' or asset at the centre of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all," Quarles said.
"While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage," he added.
That could create "a large challenge to the system," if digital currencies could not be predictably exchanged for the US dollar at a stable exchange rate in "times of adversity," he warned.
After breaking through the $11,000 level on Wednesday, only hours after hitting $10,000 for the first time, bitcoin fell sharply and was trading at $9,670.85 yesterday with a total market value of about $163 billion.
Amid the turbulent price fluctuations, the White House said Homeland Security Advisor Tom Bossert was monitoring the situation and had discussed it in a meeting this week.
Meanwhile, the Bank of France Governor Francois Villeroy de Galhau warned today bitcoin is a speculative asset and people who invest in it do so at their own risk.
"We need to be clear - bitcoin is in no way a currency, or even a cryptocurrency," Villeroy said in remarks made at a conference in Beijing, according to the Bank of France.
"It is a speculative asset. Its value and extreme volatility have no economic basis, and they are nobody's responsibility. The Bank of France reminds those investing in bitcoin that they do so entirely at their own risk," he added.
Bitcoin hovered around $9,600 in volatile trade today, after tumbling about 15% from an all-time high hit this week as some money managers warned ominously of a bubble and further falls.