Category Archives: Dong He

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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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IMF: Fiat Needs New Ideas to Compete with Crypto

Fiat currencies need work, according to an International Monetary Fund (IMF) official, suggesting that they need new ideas to make them more of an attractive proposition for users in the “digital age”, according to Cointelegraph.

Dong He, IMF’s Deputy Director of the Monetary and Capital Markets Department, has published an article suggesting that the way to make fiat currencies “more attractive”, and, thereby, more competitive in the light of potential competition from cryptocurrencies, require three main areas needing improvement.

Dong said that fiat currencies, in the hands of central banks, need to become “more stable units of account” with fresh ideas, referring back to an earlier statement by IMF Managing Director Christine Lagarde who claimed that “…the best response by central banks [to crypto] is to continue running effective monetary policy while being open to fresh ideas and new demands, as economies evolve.”

IMF boss Lagarde has developed a positive, if not guarded, approach to cryptocurrency development in past months, according to an earlier report by Bitcoin News. In the last weeks, the French lawyer commented in an official IMF blog post that both “crypto-condemnation” and “crypto-euphoria” should be substituted by taking a clear-minded and rational approach to the regulation of cryptocurrencies. She wrote:

“Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills. That is why policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit.”

Dong echoed Lagarde’s view that regulation is necessary but added that it necessitates a way of ensuring that a soft- handed regulation of cryptocurrencies would give them an “unfair competitive advantage” and that this should be avoided. He said, “That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.”

The deputy director went on to say that the issuing of a CBDC could reduce transaction costs for individuals and small businesses as well as allow long-distance transactions. This he said would make “central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves”.

In March, Lagarde said that crypto markets must be regulated by the same laws that apply to traditional markets and that regulations must be developed on a global scale with help from the IMF.

 

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