IMF Endorses Central Bank Digital Currencies

To avoid losing their key monetary policy role in an increasingly digital, sharing, and decentralized service economy, central banks must consider turning to central bank digital currency (CBDC), an IMF official claims.

by Marin Marinov
01 June • 5 min
In Regulation

Digital currencies will likely reduce demand for state-backed money one day, limiting the central banks’ ability to conduct their key monetary policy function, a high-ranking IMF official claims in a new publication, urging central banks to take measures like issuing their own fiat-backed digital tokens.

Using the term “crypto asset” not “virtual currency” or “cryptocurrency”, Dong He, deputy director of the Monetary and Capital Markets Department of the International Monetary Fund (IMF), outlined three main measures that government and central bank authorities should take to combat potential “competitive pressure” from these assets.

Among them, central banks should strive to make fiat money more attractive as a medium of exchange in the digital economy.

“For example, they could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are,” He wrote in the June edition of IMF “Finance and Development” Magazine.

The official noted that central bank digital currencies (CBDC) could help when demand for reserves diminishes.

“The use of such currencies [CBDC] would also help central banks continue to earn income from currency issuance, which would allow them to continue to finance their operations and distribute profits to governments.

Central banks should also make fiat currencies better and more stable units of account, including by improving their economic forecasts by making use of big data, artificial intelligence, and machine learning”.

several coins on a three

Last but not least, “government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation,” He noted. “That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.”

Cryptocurrencies -  a threat to central banks?

At the moment, crypto assets like Bitcoin (BTC)Ethereum (ETH) and Ripple (XRP) present no threat to central bank authority and fiat money dominance because of their volatility and citizens’ general mistrust in digital coins, He claims.

“What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities,” He explained in the article.

“But continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age,” the IMF official warned.

The publication comes shortly after several central banks hinted they are looking into the issuing of a national fiat-backed cryptocurrency, including the Bank of England, and the central banks of Norway, Switzerland, and South Korea. On the other hand, the Hong Kong Monetary Authority (HKMA) said it sees no benefits in issuing CBDC.