Tue 20 October 2020:
The International Monetary Fund (IMF) said that the push by central banks to develop digital currencies entails both risks and benefits at the global and local levels.
According to a new report by the international financial body, rapid progress in digital technologies has increased the likelihood of adopting new forms of digital currencies for both domestic and international transactions.
These include central bank digital currencies (CBDCs) and so-called global stable coins (GSCs) proposed by big technological companies, the report said.
Ongoing progress in digital technology has made it possible for new forms of digital money to be cheaper and faster than traditional electronic instruments, especially for cross-border payments.
As compared to credit cards, CBDCs and GSCs do not incur expensive interchange or foreign transaction fees, in part reflecting the fact that they do not require the multi-layered clearance and settlement infrastructure behind credit card transactions.
Also, they can be transferred over a peer-to-peer system in real time around-the-clock essentially bypassing the correspondent banking relationships.
It stressed that these will increase competition, reduce transaction costs, expand access to services and encourage financial participation via mobile devices.
Big Techs appear to be poised to issue GSCs. Individuals and firms increasingly rely on platforms offered by Big Techs to connect with one another and to exchange goods and services.
These companies, benefitting from network effects as result of their large number of users and their ability to bundle different products, may issue stablecoins that could have the potential for large-scale adoption.
For example, Facebook and its partners announced their intention to launch Libra, a blockchain-based digital money fully backed by assets denominated in reserve currencies. Other Big Techs could follow suit. At the beginning, Big Techs might choose to peg their GSCs to existing reserve fiat currencies so as to engender trust in the stability of their value.
But, over time as adoption becomes global, GSCs might be de-linked from fiat currencies. They could become an independent unit of account with no backing other than the trust from users that they would be accepted as payments.
Their value could be preserved by the issuer committing to a credible set of rules or principles such as the amount and pace of issuance, the level of interest to be paid or fees to be charged, much like central banks conduct monetary policy albeit without necessarily the same instruments or objectives.
“CBDCs and GSCs could make cross-border payments less costly and make it easier for households and small firms to have access to financial services,” the report said.
But it added that it can also reduce the ability of local governments to conduct monetary policy and control domestic financial conditions.
“Digital money adoption across borders also entails risks and policy challenges,” it noted, adding this could increase pressures for currency substitution.
Without appropriate measures, foreign CBDCs and GSCs could facilitate illicit flows, it said, adding this will make it difficult for regulatory authorities to enforce exchange restrictions and capital flow management measures.
The scale of digital money adoption will rely on strong network effects but will also depend on design features, country circumstances, legal frameworks and regulation, the report said.
Payments and financial services provision will likely become increasingly integrated with the digital economy organized through the internet and mobile phones. While
digital technology can quickly spread internationally, and the rise of new forms of digital money could lead to a more efficient and a more integrated global financial system, monetary policy effectiveness could be affected and sovereign governments might have to use various policy tools to maintain monetary and financial stability, including fiscal, macroprudential policies, and CFMs.
This also includes a robust legal framework, which plays a critical role in allowing instruments to acquire official status as a legally accepted means of payment and has a major impact on their use.
