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IMF Urges Consideration of National Crypto: Harness Benefits, Manage Risks

Reaffirming an open stance to the versatile application of blockchain technologies and digital currencies, International Monetary Fund (IMF) Managing Director Christine Lagarde has furthered the discussion surrounding the prospect of central bank digital currencies (CBDCs). She said that they should be considered and urged further discussion about the potential roles of central banks.

Speaking at the Singapore Fintech Festival on  14 November 2018, Lagarde opened up to the audience about the disruptive nature of technological change and said: “The key to is to harness the benefits while managing the risks”.

Crypto-race

In her speech, she noted three areas for her address: the evolving nature of money and fintech development, central bank roles in the new financial landscape, especially regarding CBDC, and an examination of downsides and steps toward mitigation.

Noting the larger names in the space such as Bitcoin, Ethereum and Ripple, Lagarde believes that cryptocurrencies are seeking a firm position in the “cashless world” and are “constantly reinventing themselves” as they hope to seek more legitimate grounds through stable values, as well as cheaper and faster transaction settlements.

CBDCs

According to Lagarde, e-money providers consider themselves to be less risky than banks due to the fact that they do not lend money and that cryptocurrencies are seeking to “anchor trust in technology”. However, she remains skeptical and retains the belief that “proper regulations of these entities will remain a pillar of trust”.

Lagarde published an article earlier this month (November 2018) that established the case for regulations that don’t stifle innovations, offering a balanced argument for and against cryptocurrencies.

After revealing the latest IMF paper named Casting Light on Central Bank Digital Currencies, one that covers the pros and cons of the concept, Lagarde said, “We should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

Key points

Firstly, she argued that CBDCs may offer “great promise” in the area of financial inclusion; at their core, cryptocurrencies are capable of reaching any corner of the globe with a computer and an internet connection, thus providing rural areas populated with individuals and businesses with a robust financial tool. Efforts to connect unbanked rural areas to the national financial network are already underway in the Philippines.

Secondly, she discusses digital currency in the context of security and consumer protections; suggesting that just as the introduction and subsequent dominance of cash (paper and coins) provided a low-cost and widely available solution, digital currencies can also do so.

She said: “Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative — as did its grandfather, the old reliable paper note.”

Lagarde sees digital currencies as having a third potential benefit which is privacy, though she also argues that banks would not be ready to offer a fully anonymous digital currency due to it creating a “bonanza for criminals”.

Lastly, she lists three downsides to CBDCs: Financial integrity risks, financial stability, and risks to innovation, areas that have also been questioned by other institutions around the world including the Bank of England.

Conclusively, Lagarde looks optimistically toward the future and “more fundamentally”, retaining an open mind to change. She said, “In the world of fintech, we need to harness change so it is fair, safe, efficient, and dynamic.”

 

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