Central banks should consider issuing digital currency: IMF boss Lagarde

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Central banks should consider issuing digital currencies as the currency faces a “historic turning point”, according to IMF Managing Director Christine Lagarde.

In a speech at the Singapore Fintech Festival on Wednesday, Lagarde highlighted the changing nature of silver as demand for physical silver declines around the world. She said central banks have a role in providing money to the digital economy.

“I think we should consider the possibility of issuing a digital currency,” Lagarde said.

Lagarde said a central bank-backed digital currency could help promote financial inclusion, payment security and privacy as a low-cost and efficient alternative to paper notes. But she also warned of risks to financial stability and innovation.

“My message is that while the case for digital currency is not universal, we should study it further, seriously, carefully and creatively,” Lagarde said.

Central banks around the world are assessing how the increase in non-cash payments affects their conventional role of printing banknotes and managing the money supply. Lagarde singled out central banks in China, Canada, Sweden, and Uruguay that are “embracing change and new thinking” about how they might provide digital currencies to the public.

For example, Sweden’s central bank, the Riksbank, plans to pilot a version of a digital currency called e-krona in 2019. Sweden is considered one of the most cashless societies in the world, with only 13% of Swedes used cash for their last in-store purchase, according to a recent Riksbank survey.

Central bank backed digital currency

Deposits held in commercial banks are already digital, but a digital currency could be backed by the government the same way cash is today, Lagarde said. Digital currencies could take the form of a government-backed token or an account held directly at the central bank.

Cryptocurrencies like bitcoin, on the other hand, offer a “decentralized” option, which means that they are not controlled by a central authority. Lagarde said she was “not entirely sold” on cryptocurrencies rooted in “trust in technology.”

“Appropriate regulation of these entities will remain a pillar of trust,” she said.

“Immediate, safe, cheap and semi-anonymous”

To promote competition in the financial services sector, Lagarde said central banks could partner with the private sector. Banks and financial institutions could manage a customer’s assets while governments conduct digital transactions, she said. This arrangement would continue to encourage innovation among banks and start-ups while allowing central banks to focus on their “final settlement” advantage.

“The advantage is clear,” Lagarde said. “Your payment would be immediate, safe, cheap and semi-anonymous.”

The IMF released a new paper on Wednesday assessing the case for a central bank-backed digital currency. He found that it is too early to draw conclusions on the net benefits, as each country faces unique circumstances regarding the use of cash and the adoption of e-money. Lagarde said policymakers need to be open-minded about changes in the financial landscape.

“Technology is going to change, is going to change us, so we should change too,” she said.