The plunging prices of bitcoin and other cryptocurrencies are validating sceptics who deride them as pure speculative bubbles, enabling a global cesspool of illegal commerce. The environmental cost of the massive energy consumption needed to create bitcoin is another strike against it. Whatever happens to bitcoin, its underlying technology, called blockchain, could transform the worlds of finance and central banking.

Central banks, including the US Federal Reserve, need to figure out the implications of such distributed ledger technologies and how to adapt to them. At the very minimum, there are looming changes to how central banks run monetary policy and ensure financial stability. 

Unofficial cryptocurrencies are not about to displace central bank currencies. Moreover, the Fed arguably has little to worry about given the dominance of US financial markets and the dollar in global finance. Still, even the Fed risks being outrun by rapid technological change in financial markets that could strike at its core functions. It should instead seize the opportunity to lead the world’s central banks by harnessing the powers of the new technology.