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IMF Exec: Crypto Could Weaken Central Bank Power over Monetary Policy

The deputy director of the International Monetary Fund’s (IMF) monetary and capital markets department, Dong He, has shared his views on how global adoption of cryptocurrency could change the financial world. One of the biggest takeaways from Dong He’s analysis is that he thinks cryptocurrency could deprive central banks of their ability to carry out monetary policy.

Clearly, cryptocurrency is now on IMF’s radar based on Dong He’s analysis, and the sentiments of a pivotal player in the global financial system could bear implications on the industry.

Dong He says that cryptocurrency has an advantage over banks when it comes to speed, anonymity, and divisibility. Indeed, a Bitcoin can be divided down to 1 satoshi (0.00000001 Bitcoin, currently worth USD 0.000074), while fiat currencies, in general, can only be divided down to 0.01, making cryptocurrency better than fiat for micropayments. Also, banks require users to divulge their full identity information before making a transaction, while with Bitcoin a user can send as much money as they want anywhere in the world without exposing personal identification information.

However, he says the fixed supply of Bitcoin at 21 million coins is a disadvantage since that will lead to deflation which is theorized to reduce economic activity due to money hoarding. According to him, a stable monetary system must protect against deflation. This point can be debated, however, as a deflationary currency like Bitcoin is a fresh of breath air after the intense inflation the world has experienced.

He notes that cryptocurrency has rapidly accelerated cross-border payments: with cryptocurrency it takes days instead of seconds since there are no intermediaries.

Due to the advantages of cryptocurrency over fiat, Dong He speculates that cryptocurrency will reduce the demand for central bank money. Central banks conduct monetary policy by setting interest rates for inter-bank transactions, but if they cease to have a monopoly over the money supply due to cryptocurrency, then their power to control monetary policy will weaken.

Essentially central banks have no control over cryptocurrency, so whatever money is invested into cryptocurrency is outside of their control.

Dong He suggests a few things central banks can do to remedy the situation. They could make fiat currencies better and more stable so people choose fiat over crypto, regulate cryptocurrency to remove the competitive advantage cryptocurrency has from lack of regulation, or make their money more attractive by releasing their own cryptocurrency.

Unfortunately, up to this point, central banks seem to just be taking one of his suggestions and have been hitting cryptocurrency with more and more regulations. One could hope that eventually they will change their attitude and improve their monetary policies to be more competitive instead of trying to weaken cryptocurrency’s advantages with unfair regulations.

The IMF is headquartered in Washington DC and is an international organization of 189 countries that seek to influence global monetary policy. It is in control of hundreds of billions of USD of reserves which are often used to help countries in peril from debt.

 

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