History advances with uneven steps. Just as the telegraph erased time and distance on the 19the century, today’s innovations in digital currency can bring about significant changes in the way we conduct our lives. The shift to electronic payments and social interactions brought on by the pandemic may lead to equally rapid and pervasive transformations.
But we have to look beyond the glare of technology and the alluring image of futuristic payment services. At the IMF, we need to identify and help countries resolve the deeper political trade-offs and challenges that arise.
The rapid pace of change is a call to action – for countries to lead, not by, today’s transformations. It is also important for the IMF to engage early with countries and initiate reforms that will contribute to the stability of the international monetary system and promote solutions that work for all countries. There is a window of opportunity to maintain control over monetary and financial conditions and to improve market integration, financial inclusion, economic efficiency, productivity and financial integrity. But there are also downside risks on each of these fronts. We must adopt the right policies today to reap the rewards tomorrow.
We highlight this in two articles published today, one on new policy challenges and the other on an operational strategy for the Fund to engage with countries on the digital currency revolution.
Digital currency is growing rapidly
Digital forms of money are diverse and change rapidly. They include central bank digital currencies (CBDCs) issued by the public – think of them as digital money, although they don’t necessarily offer the same anonymity to avoid illicit transfers. Private initiatives are also proliferating, such as eMoney (like Kenya’s mobile money transfer service MPesa) and stablecoins (digital tokens backed by external assets, like the USD-coin and the proposed Diem). These are valuable digital representations that can be transferred with the click of a button, in some cases across national borders, as easily as sending an email. The stability of these means of payment, when measured in national currencies, varies considerably. The least stable of the lot, which can hardly be considered cash, are crypto-assets (such as Bitcoin) which are not backed and subject to the vagaries of market forces.
These innovations are already a reality and are developing rapidly. According to IMF data, CBDCs are closely analyzed, tested, or likely to be issued in at least 110 countries. Examples range from the Bahamian sand dollar already in use at the People’s Bank of China eCNY pilot project, to countries like the United States where the pros and cons of a digital dollar are still being explored. Stablecoins, still esoteric two years ago, have tripled in value in the past six months (from $ 25 billion to $ 75 billion), while cryptoassets have doubled (from $ 740 billion to $ 1 400 billion dollars). And adoption is global. Electronic money accounts are not only growing much faster in low- and middle-income countries than in rich countries, but are now also growing in number. Africa, in particular, is showing the way.
The opportunities are immense. A local craftsman can receive inexpensive payments, potentially from overseas customers, in an instant. A large financial conglomerate can pay for asset purchases much more efficiently. Friends can split bills without having cash. People without a bank account can safely save and create transaction histories to obtain microloans. Money can be programmed to be used only for certain purposes and can be accessed seamlessly from financial and social media applications. Governments can tax and redistribute income more efficiently and transparently.
Policy implications – opportunities and challenges ahead
We may reap these benefits well, but we need to be aware of the risks and, most importantly, the political implications and greater trade-offs. The challenges facing policymakers are serious, complex and pervasive.
The most important implications concern the stability of the international monetary system. Digital currency must be designed, regulated and delivered in such a way that governments maintain control over monetary policy to stabilize prices and capital flows to stabilize exchange rates. These policies require expert judgment and discretion and should be taken in the public interest. Payment systems must become more and more integrated between countries, and not fragmented into regional blocs. And it’s critical to avoid a digital divide between those who benefit from digital currency services and those who stay. In addition, the stability and availability of cross-border payments can support international trade and investment.
There are also implications for national economic and financial stability. The public and private sectors should continue to work together to deliver money to end users, while ensuring stability and security without stifling innovation. Banks could come under pressure as specialist payment companies compete for customers and their deposits, but the credit supply must be maintained even during the transition. And fair competition must be maintained, which is no easy task given the big tech companies entering the payments world. In addition, governments should take advantage of digital money to facilitate the transfer of social benefits or the payment of taxes. It is even possible to strengthen financial inclusion by reducing the costs of accessing payment and savings services.
Finally, new forms of money must remain trustworthy. They must protect consumer wealth, be secure and anchored in strong legal frameworks, and avoid illicit transactions.
The challenges are great, as is the potential reward. But political action must begin immediately. Now is the time to establish a common vision for the future of the international monetary system, strengthen international collaboration, adopt policies and establish legal and regulatory frameworks that will stimulate innovation for the benefit of all. country while mitigating risk.
Choosing the right path now is essential. Regulation, market structure, product characteristics and the role of the public sector can quickly become rigid around less desirable outcomes. Going back later can be very expensive.
The IMF’s mandate is to ensure that the widespread adoption of digital currency promotes national economic and financial stability and the stability of the international monetary system. We plan to engage regularly with national authorities to assess country-specific policies, provide capacity building to avoid a digital divide, and develop analytical foundations to identify policy options and trade-offs.
To do this, the IMF must deepen its expertise, broaden its competencies, increase its resources and take advantage of its near-universal membership. Yet we cannot do it alone. The challenges are so complex and multifaceted that close collaboration with other stakeholders is necessary. The World Bank, the Bank for International Settlements and its innovation hub, international working groups and standardization bodies, as well as national authorities, are all complementary partners, each with their specific mandate and expertise. By joining hands, we’ll help households and businesses reap the benefits and avoid the pitfalls of the digital currency revolution.
* About the authors:
- Tobias Adrien is a financial adviser and director of the IMF’s Monetary and Capital Markets Department. He leads the IMF’s work on financial sector surveillance and capacity building, monetary and macroprudential policies, financial regulation, debt management and capital markets.
- Tommaso Mancini-Griffoli is Division Chief in the Monetary and Capital Markets Department of the International Monetary Fund (IMF), focusing on monetary policy, central banking and fintech.
Source: This article was published by IMF Blog