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Fed's Quarles warns that digital currencies like bitcoin pose 'serious financial stability issues' as they grow

  • Fed Governor Randal Quarles warns that bitcoin and other cryptocurrencies pose increasing dangers as they become more popular.
  • Bitcoin's price plunges one day after crossing $11,000.

Bitcoin and other cryptocurrencies pose greater danger to the financial system as they become more popular, new Federal Reserve Governor Randal Quarles warned in a speech Thursday.

On the same day bitcoin prices plunged after a massive rally, the central bank official cautioned about the growth that digital currencies have seen and the destabilizing effect they could pose in times of liquidity stress.

"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," Quarles said, according to prepared remarks from a speech he is delivering in Washington.

Quarles said that if digital currencies can't be exchanged at a stable rate for dollars during difficult times, "the resulting price risk and potential liquidity and credit risk pose a large challenge for the system."

Bitcoin's price crossed $11,000 Wednesday before retreating Thursday for a drop that exceeded 5 percent at one point.

Quarles mentioned bitcoin specifically once in the speech, keeping his remarks to the broader world of digital currencies.

Cryptocurrencies operate through a technology called blockchain that allows users to exchange the currency across cyberchannels. The technology has been deemed important to the banking industry by CEOs like JPMorgan Chase's Jamie Dimon, who nonetheless has been critical of bitcoin and its competitors.

"I believe the financial industry is increasingly recognizing that we should separate the concept of digital currencies from the innovative new technologies that they have employed to transfer assets," Quarles said.

In a speech Wednesday, New York Fed President William Dudley said the central bank has begun thinking about its own digital currency, though he added that it's premature to make any moves.

Quarles elaborated on the issue, saying there have been suggestions that the Fed enter the space as a preventive measure and develop its own cryptocurrency. He expressed hesitancy about the issue.

"I am particularly concerned that a central-bank-issued digital currency that's held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing," Quarles said. "The effect of all this would significantly divert our focus from work to improve or establish new private-sector retail payment systems based on existing institutions."

WATCH: Carl Icahn weighs in on bitcoin.