## ppea2021054

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### Forces of Change
- Rapid technological innovation is ushering in a new era of digital money; payments will become easier, faster, cheaper, more accessible, and cross borders swiftly.
- Digital forms of money discussed:
  - central bank digital currencies (CBDCs) (e.g., PBOC’s eCNY pilot project, the Bahamas’ Sands Dollar);
  - privately issued “stablecoins” (e.g., Diem and USD Coin);
  - eMoney (e.g., M-Pesa);
  - cryptoassets (virtual assets, e.g., Bitcoin).
- February 2021 survey of IMF mission chiefs: digital currencies are being closely analyzed, piloted, or likely to be issued in 70 percent of 159 countries.
- Key distinguishing features: issuer; denomination; convertibility/redemption; type of backing; technology (centralized/decentralized; permissioned/permissionless).
- Observations:
  - eMoney pledges redemption at a fixed face value; not all stablecoins do so.
  - Stablecoins typically rely on decentralized settlement; eMoney settlement can be centralized or decentralized.
  - Cryptoassets do not meet most standards for money due to volatility and lack of backing, though corporate acceptance is increasing.
- Adoption drivers and enabling trends:
  - Efficiency as means of payment: low transaction costs, accessibility, programmability, strong network effects.
  - Technology and infrastructure: DLTs becoming faster, more secure, more energy efficient, increasingly scalable and interoperable.
  - AI and Big Data increasing value of payment-related data.
  - New service providers: fintechs, telecoms, Big Techs, adapting banks; integrated global platforms.
  - Migration of financial assets to DLT may rely on digital money and interoperable networks (example: project Helvetia).
  - Public initiatives: national digital identities (example: India’s Aadhaar); use of digital money for government transactions (Peru, Togo, India, Philippines).
  - Consumer expectations for convenience, immediacy, accessibility, low cost; poorer segments pay disproportionately higher fees today.
  - Cross-border expectations: payments should span borders as simply as sending an email.
- Covid-19 acceleration:
  - Q2 2020 worldwide transactions via PayPal increased by 15 percent, and the number of new active accounts doubled relative to the start of the pandemic.
  - Research and Markets (June 2020): nearly 50 percent of global shoppers were using digital payments more than before the pandemic; the majority planned to continue doing so.

### Policy Implications and New Questions Asked by Member Countries
- Policy implications fall into three categories:
  - International implications for the international monetary and financial system (IMS).
  - Narrow domestic implications related directly to digital forms of money (consumer protection, safety and soundness, financial integrity).
  - Broad domestic implications (innovation, credit provision and banking, competition, financial inclusion, climate sustainability, fiscal policy effectiveness).
- Domestic and international implications are linked: domestic stability affects exchange arrangements and the IMS; a common IMS vision conditions domestic design and regulation of digital money.

### Implications for the International Monetary and Financial System (IMS)
- IMS defined: rules/conventions (monetary and exchange rate arrangements, cross-border payments for capital account transactions, capital flows and related management measures, international reserves, bilateral swap lines), mechanisms for balance-of-payments adjustments and a global safety net, and robust institutions.
- Scenario considered: widespread adoption of a stablecoin that adopts its own unit of account and becomes a global private digital currency, potentially abandoning fiat backing and managing value via issuance and FX interventions.
- Monetary and financial issues:
  - Widespread currency substitution would undermine monetary policy independence and lending of last resort.
  - Digital money could increase currency substitution, especially in countries with high inflation and volatile exchange rates.
  - Foreign currency deposits are higher than 50 percent in more than 18 percent of countries worldwide.
  - Substitution into a global private digital currency exposes countries to risks from issuer policy choices differing from local central banks.
  - Technical feasibility and policy desirability of limiting circulation, transactions, and holdings of foreign digital money raise complex questions; global coordination would be needed to avoid arbitrage.
  - Digital money may increase gross capital flows and cross-border integration, facilitating hedging but raising contagion risks and capital flow volatility.
  - The pattern of net capital flows is difficult to forecast and requires further analysis.

### Payments, Interoperability, Reserve Currencies, and Backstops
- Payments and Interoperability:
  - Higher gross capital flows and potentially less effective capital flow management could make it harder to manage financial conditions and exchange rates.
  - Risk of fragmentation and a global digital divide; regional settlement arrangements could proliferate and be used to avoid or impose bilateral sanctions.
  - Interoperability raises questions on international data exchange/treatment, liquidity backstops for payment systems, multilateral settlement/FX platforms, common design norms (identity validation, data transfer), and convergence of regulatory/legal frameworks.
  - Strong international cooperation and a clear global vision are required to avoid fragmentation; the IMS stands at a crossroads between integration and fragmentation.
- Reserve currency configurations and backstops:
  - One scenario: the dollar becomes more dominant if available digitally at lower cost and broader reach.
  - Alternate scenario: other reserve currencies could gain if they offer cost, trust, and ease-of-use advantages.
  - Digitalization may accelerate reserve currency changes but not dramatically over a short period; regional patterns may evolve faster.
  - Tail risks of sudden shifts in reserve currency configurations concern policymakers; transition could be unstable as investors rebalance official foreign reserve portfolios.
  - Programmability could facilitate regional pooling/sharing of official reserves; regional backstops may be reinforced alongside IMF global backstops.
  - Proposals to centralize/mutualize the discretionary network of bilateral central bank swap lines merit exploration.
  - IMF operations and lending could benefit from digital money technologies to expedite disbursements, subject to the IMF’s Articles of Agreement.
  - Global stablecoins in their own denomination raise risks: lack of safe assets and a credible safety net; raises questions on evolving the global safety net and potentially lending in new forms of money.

### Narrow Domestic Implications: Consumer Protection, Safety and Soundness, Financial Integrity
- Consumer Protection and Privacy:
  - Stablecoins pose consumer protection risks from losses on reserve assets, illiquidity, or seizure in issuer bankruptcy undermining redemption at fixed face value.
  - Runs from stablecoins could materialize; large stablecoin providers increase systemic effects.
  - Runs from banks to stablecoins or CBDC are less likely domestically where deposit insurance and liquid safe alternatives exist; CBDC may allow central banks to accommodate sudden liquidity demand more easily.
  - Regulatory questions: should issuance be fully backed; what assets qualify as reserves; where should reserves be held; legal protection of reserves in issuer bankruptcy.
  - Regulatory approaches and legal frameworks are fragmented; country circumstances differ significantly.
  - Privacy protection is key to promote trust, but balancing privacy, private sector participation, and financial integrity (FATF standards) is challenging.
- Safety and Soundness:
  - Need for clear legal frameworks: public law status of CBDC; legal status of privately issued money (stablecoins); private law aspects (finality, rights on insolvency).
  - Classification decisions will materially affect exchangeability and development; many jurisdictions lag in clarifying these areas.
  - Legal frameworks must adapt to AI and responsibility allocation between service providers and enabling software; preparedness reviews by authorities appear lacking.
  - Operational resilience and cyber-security are crucial; heightened interconnections raise contagion risk for CBDC and stablecoins.
  - Cryptoassets market capitalization: currently nearly $2 trillion, up from $200 billion a year ago.
  - Cyber-security is the second most important issue mission chiefs report central banks worry about with digital money; other risks include outages, technical glitches, fraud, faulty algorithms.
- Financial Integrity:
  - Central banks are most concerned with AML/CFT implications of digital money.
  - Without proper regulation, digital money can become a virtual safe-haven for illicit transactions; robust AML/CFT frameworks are needed.
  - CBDC must be designed not to impede effective AML/CFT controls; privately issued digital money providers must be subject to AML/CFT obligations and supervision or monitoring.
  - Digital money could facilitate monitoring through more efficient real-time data analytics.
  - Many countries lack capacity to implement and monitor AML/CFT measures in the digital world; FATF has clarified how controls apply but implementation is uneven.

### Broad Domestic Implications: Innovation, Banking, Competition, Inclusion, Climate, Fiscal Policy
- Innovation and Public-Private Partnerships:
  - Tradeoffs: innovation, efficiency, service choice, safety, banking structure, and stability.
  - Most money today is privately issued by commercial banks as deposits redeemable into currency at fixed face value, supported by prudential regulation and backstops.
  - Policy questions: how to regulate stablecoins; could some obtain special licenses to be fully backed with central bank reserves under strict supervision; central bank decisions on private sector involvement in CBDC provision.
  - Bank of England (2020) advanced a “platform model of CBDC”; vetting and regulation of private sector solutions remain open questions.
- Credit Provision and Banking:
  - Four channels through which digital money would alter banks’ roles, affecting credit provision, market structure, and financial stability.
  - First: digital currency as an alternative to deposits could pressure banks’ funding models and increase reliance on runnable wholesale funding.
  - Second: credit intermediation could shift to non-deposit-taking institutions and markets.
  - Third: value-added may shift to Big Techs that capture and analyze user data; Big Techs expected roles: distributors of digital money (wallet services), facilitators (messaging apps), aggregators of financial services.
- Big Techs, producer surplus, and banking risks:
  - Big Techs gathering data and managing customer relations will capture increasing producer surplus, potentially reducing bank profits and prompting risk-taking or consolidation.
  - Policy considerations: investigate the scenario’s financial stability impacts; clarify regulatory approaches to Big Techs; key question on the value of data relative to traditional collateral.
- Decentralized finance (DeFi):
  - DeFi: automated and decentralized capital markets, securities, trade finance, and lending based on digital money (mostly crypto-assets) and smart contracts.
  - Value of assets in DeFi contracts: $1 billion in January 2021.
  - Rapid growth and risks: security vulnerabilities, scaling problems, false decentralization; potential for more robust and transparent financial infrastructure.
- Collateral implications:
  - Substantial CBDC or stablecoin demand might absorb government bonds and affect the yield curve.
  - Stablecoins whose reserves cannot be lent out could reduce collateral availability.
  - Stablecoins fully backed by central bank reserves could immobilize central bank liquidity otherwise lent between banks.
- Competition and market contestability:
  - Network externalities favor first entrants or providers with pre-existing networks; Big Techs have an advantage.
  - Policy questions: mandating interoperability; enacting data portability regulations; evaluating whether data portability can counteract data-driven increasing returns to scale.
  - If breaking network effects is inefficient, consider extending utility-style regulation to digital money provision.
- Financial inclusion:
  - Key statistics:
    - One billion registered mobile money accounts across 95 countries.
    - Close to $2 billion transacted through these accounts every day.
    - Mobile money services are available in 96 per cent of countries where less than a third of the population have an account at a formal financial institution.
    - Sub-Saharan Africa accounts for almost half of mobile money accounts worldwide.
  - Observations and policy: mobile money has greatly benefited inclusion, often aided by digital IDs; Covid-19 highlighted benefits and risks of leaving some behind; invest in broader infrastructure and design to reach everyone; regulate data use, storage, ownership, transfer, and localization to balance inclusion, risk, and revenue.
- Climate sustainability:
  - Carbon footprint and energy needs of cryptoassets are a rising priority.
  - Cambridge Centre for Alternative Finance estimate: 0.5 percent of total global electricity consumption is attributed to Bitcoin.
  - Some DLT validation technologies (proof of work) are environmentally damaging.
  - Policy options: evaluate carbon footprint of specific digital monies; standardize methodologies and reporting; central banks selecting technology providers based on environmental sustainability lack guidance.
- Fiscal policy efficiency and Govtech:
  - Digital money contributes to modernization of public financial management to find fiscal space post-Covid.
  - Examples: business-to-government and person-to-government payment platforms expanded in many countries; Bangladesh, Brazil, and Togo have provided social benefits via mobile money.
  - Success requires sufficient local capacity and further study of best practices.
  - Digitalization transforms tax administration, IT strategies, data analytics, taxpayer e-services, and raises tax design challenges (taxation of digitalized businesses, VAT on cross-border e-commerce, peer-to-peer economy taxation).
- Macro benefits and evidence:
  - Al-Sadiq (2021): moves toward digital money have growth impacts, encouraging greater foreign direct investments.
  - Ouedraogo and Sy (2020): improved perception of tax officials and government corruption.

### The Fund’s Role, Capabilities, and Needs
- Legal and institutional basis:
  - Fund established to “promote international monetary cooperation…” (Article I of the IMF’s Articles of Agreement).
  - Integrated Surveillance Decision (IMF 2012) requires examining policies that significantly influence balance of payments and domestic stability.
  - Fund obligation to oversee the IMS (Article IV, Section 3(a)); assist in establishment of a multilateral system of payments for current transactions (Article 1(iv)); consider implications under Article VIII, Sections 2(a) and 3.
- Focus:
  - Policy implications of digital money for domestic and international economic and financial stability, members’ domestic and balance of payment stability, international economic and financial stability, and the IMS.
  - The Fund will not target technology development/testing/validation or topics outside its mandate; it will use technological understanding to provide policy advice.
- Core competencies to leverage:
  - Near universal membership to convene ministries of finance and central banks and foster design principles for the IMS.
  - Core policy focus on macroeconomic, macrofinancial, exchange rate, and spillover issues.
  - Broad expertise across economists, policymakers, technical/technology experts, and lawyers.
  - Unique ties to members through surveillance and capacity development; ability to invite private sector to discussions.
- Strategic aims:
  - Be an objective advisor in surveillance, a trusted partner in capacity development, a thought leader in policy development, and potentially ramp up lending to address balance of payments problems from digital money transitions.

### Surveillance: Objectives and Concrete Actions
- Rationale: digital money heightens urgency to strengthen financial and macrofinancial analysis in Article IV consultations.
- Coverage targets:
  - Cover one third to a half of countries in about 3 years, starting with most impacted countries.
  - Cover one half to two thirds in 5 years, then gradually expand to all countries.
  - Pilot assessments of payment systems, including CBDC, in selected FSAPs: about 5 per year over the next 1–3 years, up from about 1-2 per year.
  - More systematically introduce modules into FSAPs and transition to all FSAPs after 5 years.
- Expand coverage of digital money implications in spillover and flagship products; leverage policy development work to align with country needs.

### Capacity Development: Objectives and Concrete Actions
- Imperative: narrow the global digital divide (technological and capacity/voice related).
- Demand: growing need for CD and training in CBDC, payment strategies, digital risk management, legal/regulatory frameworks including AML/CFT, privately-issued digital money, and digital strategies.
- Concrete actions:
  - Deliver around 50 missions per year from headquarters and regional technical assistance centers by 3 years from now, then further increase (intermediate target represents about 1 percent of total IMF missions; current missions about 10 per year).
  - Provide regional trainings and workshops: around 1 per quarter.
  - Organize peer-to-peer learning networks with other international organizations.
  - Systematically compare cross-country experiences and spread design and policy lessons of early adopters.
  - Help countries collect and analyze data from pilot projects.
  - Create and maintain a strong online presence with resources such as simple explanatory videos.

### Policy Development, Engagement, and Resource Needs
- Policy engagement:
  - Enhance policy frameworks, develop policy lines, build consensus, engage with national authorities and international working groups, and represent interests of countries not present at the table.
  - Participate actively in international working groups (about 10 in parallel).
  - Engage more deeply at the Executive Board level; develop policy positions and analysis; coordinate internally via seminar series; overhaul high-level advisory board composition.
- Preliminary resource estimate:
  - Between 50 and 75 staff and other experts in gross terms.
  - Breakdown:
    - Extending Article IV surveillance to 50 percent of countries and covering most FSAPs: 20-30 FTEs.
    - Providing 50 CD missions per year and 4 broader CD engagements per year: 15-25 positions (including experts).
    - Policy, analytics and international coordination: 15-20 positions.
  - Resources split roughly equally between surveillance, capacity development, and policy development.
  - Magnitude approximately corresponds to current IMF staffing for banking regulation and supervision (about 60 FTEs in MCM).
  - These estimates will be revised after a concrete costing exercise; net needs will consider existing resources and synergies.
- Implementation and growth plan:
  - Initial allocation skewed towards policy development; shift to surveillance as adoption rises; capacity development to ramp up quickly and remain high.
  - Current base: about 15 FTEs working on digital money (mainly in MCM, ITD, LEG, RES, SPR).
  - Hiring priorities: macroeconomists/policymakers, financial sector experts, technology/digital risk experts, lawyers with relevant expertise, data specialists, and communications experts.
  - Recruitment risks: capacity to find and absorb new high-caliber talent; mitigation via phased growth and rotations.
  - Partnerships: BIS Innovation Hub, BIS, CPMI, FSB, World Bank to complement IMF resources and avoid duplication.

### Conclusion — Strategic Imperative
- Rapid technological change, private sector innovation, evolving end-user needs, and proactive country authorities are driving digital forms of money to center stage.
- Benefits are notable, but significant policy challenges exist and will grow, affecting domestic stability and the IMS.
- The Fund’s mandate requires monitoring, advising, and guiding this transition; the Fund is positioned given core competencies in surveillance, capacity development, policy development, and lending.
- To tackle complexity and pace of change, the Fund needs to rapidly increase resources, deepen skills, and strengthen partnerships with complementary organizations while minimizing overlaps.

*International Monetary Fund, March 19, 2021 — EXECUTIVE SUMMARY (excerpt from "The Rise of Digital Money: A Strategic Plan to Continue Delivering on the IMF’s Mandate")*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### FORCES OF CHANGE
- Rapid technological innovation is ushering in a new era of digital money; payments will become easier, faster, cheaper, more accessible, and cross borders swiftly.
- Digital forms of money discussed include:
  - central bank digital currencies (CBDCs) (e.g., PBOC’s eCNY pilot project, the Bahamas’ Sands Dollar);
  - privately issued “stablecoins” (e.g., Diem and USD Coin);
  - eMoney (e.g., M-Pesa);
  - cryptoassets (virtual assets, e.g., Bitcoin).
- A February 2021 survey of IMF mission chiefs suggests digital currencies (CBDCs) are being closely analyzed, piloted, or likely to be issued in 70 percent of 159 countries.
- Key distinguishing features of digital forms of money (Box 1):
  - issuer (private or public);
  - denomination (existing monetary unit, a basket, or a new unit of account);
  - convertibility or redemption into currency at fixed face value or at market value;
  - type of backing (reserve assets of varying stability and liquidity, possible direct legal claims, additional public backstops such as emergency liquidity);
  - technology (centralized or decentralized settlement; permissioned or permissionless networks).
- Observations on specific forms:
  - eMoney pledges redemption at a fixed face value; not all stablecoins do so (some redeem at going market value of reserve assets).
  - Stablecoins typically rely on decentralized settlement; eMoney settlement can be centralized or decentralized.
  - By most standards, cryptoassets do not represent money because of excessive volatility and lack of backing; yet growing corporate acceptance suggests increasing use to transfer value.
- Adoption drivers and enabling trends:
  - Efficiency as a means of payment: low transaction costs, accessibility, programmability (payments automation and integration), strong network effects.
  - Technology and infrastructure: distributed ledger technologies (DLTs) becoming faster, more secure, more energy efficient, increasingly scalable and interoperable.
  - AI and Big Data increasing value of payment-related data, encouraging new entrants and R&D.
  - Services and service providers: fintechs, telecoms, Big Techs, and adapting banks, with payments and financial services delivered over global platforms integrated with social and e-commerce services.
  - Migration of financial assets to DLT to simplify back-end processing will rely on digital money and interoperable networks for payment-versus-delivery (example: project Helvetia).
  - Public initiatives: national digital identities (example: India’s Aadhaar) and use of digital money for government transactions (examples: Peru, Togo, India, Philippines).
  - Consumer behavior: expectations for convenience, immediacy, accessibility, and low cost; poorer segments and countries pay disproportionately higher fees under current systems.
  - Cross-border expectations: payments should span borders as simply as sending an email.
- Covid-19 acceleration:
  - In Q2 2020 worldwide transactions via PayPal increased by 15 percent, and the number of new active accounts doubled relative to the start of the pandemic.
  - A Research and Markets report (June 2020) found nearly 50 percent of global shoppers were using digital payments more than before the pandemic; the majority planned to continue doing so.

### POLICY IMPLICATIONS AND NEW QUESTIONS ASKED BY MEMBER COUNTRIES
- Widespread adoption of digital money has profound policy implications domestically and internationally; understanding technology and adoption patterns is necessary but not sufficient for policy responses.
- The Fund is receiving increasingly pressing and complex questions from member countries about digital money; responses require understanding wider implications and coordination with other institutions.
- Policy implications roughly fall into three categories:
  - International implications for the international monetary and financial system (IMS).
  - Narrow domestic implications related directly to digital forms of money (consumer protection, safety and soundness, financial integrity).
  - Broad domestic implications (innovation, credit provision and banking, competition, financial inclusion, climate sustainability, fiscal policy effectiveness).
- The domestic and international implications are linked: domestic stability affects exchange arrangements and the IMS; a common IMS vision conditions domestic design and regulation of digital money.

### A. Implications for the International Monetary and Financial System
- The IMS comprises rules and conventions (monetary and exchange rate arrangements, cross-border payments for capital account transactions, capital flows and related management measures, international reserves, bilateral swap lines), mechanisms for balance-of-payments adjustments and a global safety net, and robust institutions.
- Multiple IMS aspects are likely to be impacted by widespread digital money adoption, including monetary and financial issues, payments, reserve currency configurations, and backstops.
- Scenario considered: widespread adoption of a stablecoin that adopts its own unit of account and becomes a global private digital currency, potentially abandoning fiat backing and managing value via issuance and FX interventions (IMF 2020).
- Monetary and financial issues:
  - Widespread currency substitution would undermine monetary policy independence and lending of last resort.
  - Digital money could lead to much more widespread currency substitution, especially in countries with high inflation and volatile exchange rates; lower costs of obtaining, storing, and spending digital money could exacerbate substitution.
  - Currency substitution is already widespread: foreign currency deposits are higher than 50 percent in more than 18 percent of countries worldwide.
  - Substitution into a global private digital currency would subject countries to additional risks because the monetary policy stance of a private firm likely differs in optimization horizon and incentives from a local central bank.
  - Countries ask what measures can be adopted to limit pressures of currency substitution from digital money introduced outside their borders and how to deal with spillovers from digital money.
  - Technical feasibility questions arise regarding limiting circulation, transactions, and holdings of foreign digital money, and the policy desirability and appropriateness of imposing cross-border restrictions.
  - On issuers’ side, it may be possible to agree on design principles to allow foreign authorities to set basic wallet or network parameters to limit currency substitution; such principles would need global coordination to avoid arbitrage.
  - Concerns that existing capital flow management measures may be circumvented by digital money transmitted on new platforms not typically bound by those measures; guidance in this area is currently missing.
  - Even if existing measures remain effective, digital money would likely increase gross capital flows:
    - Markets could become more integrated as platform-based services lower access costs and risk-sharing develops.
    - Increased integration would facilitate hedging but could increase contagion risks, as seen with growing EMDE integration.
    - Large gross foreign asset positions imply higher leverage and greater valuation effects, with knock-on effects on current account balances and potential balance of payments problems.
    - Capital flow volatility could increase due to herd effects from less informed investors.
    - The pattern of net capital flows is more difficult to forecast and requires further analysis, particularly as it relates to countries’ savings and investment behavior.

### THE FUND’S ROLE, CAPABILITIES, AND NEEDS (SUMMARIZED)
- The Fund has a mandate to help ensure adoption of digital money fosters domestic and international economic and financial stability.
- Core competencies the Fund offers:
  - near universal membership providing a platform to guide the IMS toward a common vision and foster equitable policies;
  - focus on macrofinancial policies and spillovers;
  - diversity of expertise across departments;
  - unique ties to members through surveillance and capacity development.
- The Fund must strengthen, widen, and deepen work on digital money rapidly, coordinate closely with other institutions within its mandate, and rapidly increase resources devoted to these topics.
- This paper reviews forces driving digital money adoption; considers policy implications and new policy questions; clarifies the Fund’s role; outlines a strategy; and provides initial estimates of resources necessary to deliver this vision.

*International Monetary Fund, March 19, 2021 — EXECUTIVE SUMMARY*

### 28.      With higher gross capital flows and potentially less effective capital flow management

### ppea2021054 - 28.      With higher gross capital flows and potentially less effective capital flow management

### Payments and Interoperability
- Higher gross capital flows and potentially less effective capital flow management could make it harder for countries to manage financial conditions and exchange rates, or freely choose their exchange rate regime.
- Global financial conditions could be transmitted more readily, complicating policy tradeoffs.
- Large share of countries managing exchange rates could be pushed towards more open capital accounts and flexible exchange rates, needing to maintain an effective and independent monetary policy.
- Risk of fragmentation and a global digital divide is stark; regional settlement arrangements could proliferate and be used to avoid or impose bilateral sanctions.
- Digital money enables cheap regional payment arrangements but could limit currency convertibility internationally.
- Cross-border trading of digital money transfers information, raising privacy and trust issues that require international cooperation.
- Interoperability of digital forms of money is desirable but raises questions on:
  - international exchange and treatment of data;
  - which institution will backstop liquidity for payment systems;
  - multilateral settlement or foreign exchange platforms;
  - common norms/principles for design of digital money, identity validation, and data transfer;
  - convergence of regulatory and legal frameworks.
- Strong international cooperation and a clear global vision are required to avoid fragmentation; the IMS stands at a crossroads between integration and fragmentation.

### Reserve Currency Configurations and Backstops
- Currencies used for international transactions could change with digital money:
  - One scenario: the dollar could become more dominant if available digitally at lower cost and to a wider user-base.
  - Alternate scenario: other (reserve) currencies could be used more frequently if they offer significant advantages in costs, trust, and ease of use (e.g., a foreign CBDC with a vast existing user-base).
- Widespread use of a currency is a first (though not sufficient) step toward internationalization; self-reinforcing cycle described in Gopinath and Stein (2019) relates use in trade to market development.
- Digitalization may accelerate changes to reserve currency configurations but likely not dramatically over a short period; regional patterns may evolve more rapidly where geopolitical forces are stronger.
- Policymakers are concerned with tail risks of a more sudden shift in reserve currency configurations; a more multipolar IMS could be safer and more efficient but likely more unstable during transition as investors rebalance official foreign reserve portfolios.
- Key questions on redesigning backstops:
  - programmability could facilitate regional pooling and sharing of official foreign reserves and their disbursement;
  - regional backstops may be reinforced and become more credible alongside global backstops provided by the IMF;
  - cooperation between various backstops may become increasingly important.
- Proposals to centralize and mutualize the discretionary network of bilateral central bank swap lines merit exploration; discussions are preliminary and high-level.
- IMF operations and lending could benefit from digital money technologies to expedite disbursements, subject to the IMF’s Articles of Agreement.
- Global stablecoins in their own denomination raise significant risks, including lack of available safe assets and a credible safety net; widespread adoption raises the question of evolving the global safety net and potentially lending in new forms of money.

### Narrow Implications for Domestic Economic and Financial Stability (overview)
- Digital money denominated in the domestic monetary unit raises issues for consumer protection, safety and soundness, and financial integrity; these objectives must remain priorities, especially with extensive adoption.
- Monetary policy is likely to maintain traction if digital money is credibly exchangeable at par with domestic notes and coins and the central bank remains the most credit-worthy agent in the country (Mancini-Griffoli and others, 2018). 2

### Consumer Protection and Privacy
- Stablecoins pose consumer protection risks from potential losses on reserve assets, illiquidity, or seizure by other creditors in issuer bankruptcy, which could undermine redemption at fixed face value.
- Runs from stablecoins could materialize; financial stability could suffer if reserve assets are liquidated on a large scale or withdrawn from large banks; larger stablecoin providers increase systemic effects.
- Runs out of commercial banks to stablecoins or CBDC are less likely domestically due to deposit insurance and existing liquid safe alternatives (e.g., government only mutual funds); CBDC may allow central banks to more easily accommodate sudden demand for liquidity.
- Countries face regulatory questions for stablecoins:
  - Should issuance be fully backed?
  - What assets qualify as reserve assets?
  - Where should reserves be kept—in commercial banks or central banks?
  - Are legal structures adequate to protect reserves from other creditors in issuer bankruptcy?
- Regulatory approaches and legal frameworks are fragmented with little guidance; country circumstances differ significantly.
- Safety nets and crisis management implications:
  - CBDC could improve safety net by enabling liquidity provision to meet runs at lower cost and more immediately.
  - For stablecoins, authorities must decide whether some should access deposit insurance or central bank liquidity.
- Protection of consumer data is a rising concern; privacy is key to promote trust.
- Countries struggle to balance privacy, private sector participation, and financial integrity in line with FATF standards; the latter two require greater data sharing than users may prefer.

### Safety and Soundness
- Clear legal frameworks are critical; digital money raises questions on:
  - public law status of CBDC in central bank law and monetary law;
  - legal status of privately issued money (stablecoins)—eMoney, bank deposits, securities, commodities, or other;
  - private law aspects: when payment is final and rights of holders upon issuer or depositary insolvency.
- Answers depend on design choices and country circumstances; classification decisions (e.g., treating digital money as a security) will materially affect exchangeability and development.
- Many jurisdictions lag in clarifying these areas.
- Legal frameworks must adapt to more intensive use of artificial intelligence, which clouds responsibility between end-service providers and enabling software; preparedness reviews by central banks and regulatory authorities appear lacking in many cases.
- Operational resilience, including cyber-security, is crucial; heightened interconnections increase contagion risk for CBDC and stablecoins.
- Cryptoassets are rapidly growing in market capitalization (currently nearly $2 trillion, up from $200 billion a year ago) and are increasingly held by mainstream financial institutions.
- Cyber-security is the second most important issue mission chiefs report central banks worry about with digital money; digital risks also include outages, technical glitches, fraud, and faulty algorithms.
- Major outages (e.g., Google cloud, Target2) could become more frequent.

### Financial Integrity
- Central banks are most concerned with financial integrity implications of digital money.
- Without proper regulation, digital money can become a virtual safe-haven for illicit transactions; robust AML/CFT frameworks are needed.
- CBDC must be designed not to impede effective AML/CFT controls; privately issued digital money providers must be subject to AML/CFT obligations (including reporting suspicious transactions) and supervision or monitoring.
- Digital money could facilitate monitoring through more efficient real-time data analytics.
- Many countries lack capacity to implement and monitor AML/CFT measures in the digital world, risking attraction of criminals and unlawful providers seeking regulatory arbitrage, which could further limit correspondent banking relationships.
- FATF has clarified how AML/CFT controls apply to the digital world, but implementation remains uneven and challenging.

### Broad Implications for Domestic Economic and Financial Stability
- Domestic digital money denominated in the domestic unit affects innovation, credit provision and banking, competition, financial inclusion, climate sustainability, and fiscal policy effectiveness.
- Each area raises opportunities and risks and policy questions to preserve stability.
- Monetary policy transmission could be more effective if digital money spurs financial inclusion; interest-bearing CBDC could eliminate the zero lower bound if cash use is constrained, but political repercussions are a concern.

### Innovation and Public-Private Partnerships
- Public-private demarcation and collaboration in digital money provision requires further analysis and testing; tradeoffs: innovation, efficiency, service choice, safety, banking structure, and stability.
- Most money today is privately issued by commercial banks as deposits redeemable into currency at fixed face value; prudential regulation and backstops (deposit insurance, lender of last resort) make redemption credible.
- Policy questions on extending the public-private system into the digital era:
  - How should stablecoins be regulated?
  - Could some stablecoins obtain special licenses to fully back coins with central bank reserves under strict supervision to allow private innovation while limiting destabilizing runs? Such licensing could favor bank disintermediation and requires careful regulatory design.
- Central banks must decide private sector involvement in CBDC provision; few expect to service users directly; many are open to private sector role (wallet services, expanded feature-set).
- The Bank of England (2020) advanced a “platform model of CBDC”; vetting and regulation of private sector solutions remain open questions.
- Some countries may seek a public monopoly on money issuance; decisions will balance stability, operational resilience, innovation, and product variety.

### Credit Provision and Banking
- Widespread adoption of digital money (CBDC or stablecoins) would likely alter banks’ roles through at least four channels, affecting credit provision, market structure, and financial stability.
- First channel: digital currency as an alternative to deposits could pressure banks’ business models—banks may pay higher deposit rates or shift to more expensive, runnable wholesale funding, respond by taking greater risks, or face heightened market discipline leading to higher lending rates or lower margins (Agur, Ari, and Dell’Ariccia 2019).
- Second channel: credit intermediation could shift from banks toward non-deposit-taking institutions and markets; the desirability and stability of such a new equilibrium are uncertain and require country policy positions to manage potential bank disintermediation.
- Third channel: value-added may shift from traditional banks to Big Techs that can capture and analyze user data efficiently; Big Techs are expected to be involved in payments as distributors of digital money (wallet services), facilitators of digital money services (messaging apps initiating transactions into separate wallets), and aggregators of financial services (platforms analogous to Amazon or Alibaba).

*Source: ppea2021054 — excerpt from provided content.*

### 64.      As Big Techs gather data, manage customer relations through ubiquitous digital

### ppea2021054 - 64.      As Big Techs gather data, manage customer relations through ubiquitous digital

### Big Techs, producer surplus, and banking risks
- As Big Techs gather data, manage customer relations through ubiquitous digital platforms, and become essential to better design and customize financial services, they will keep an increasing share of the producer surplus.
- Potential consequences:
  - Downward pressure on bank profits.
  - Some banks may take more risks; others may consolidate and concentrate on commoditized back-end treasury services such as liquidity provision.
- Policy considerations:
  - Investigate early the degree to which this scenario could materialize and undermine financial stability so corrective policy action can be taken immediately.
  - Clarify regulatory approaches to Big Techs since capital, loan retention, and licensing requirements will affect the scenario’s likelihood.
  - Key open question: the value of data relative to traditional collateral and the degree to which data on a loan recipient should alleviate capital charges on that loan.

### Decentralized finance (DeFi)
- Characterization:
  - DeFi covers automated and decentralized capital markets and related securities, trade finance, and lending based on digital money (mostly crypto-assets thus far) and smart contracts.
- Market size and risks:
  - The value of assets in DeFi contracts amounted to $1 billion in January 2021.
  - Rapid growth noted; the Federal Reserve Bank of St. Louis primer warns of risks including security vulnerabilities, scaling problems, and false decentralization, while underscoring potential for a more robust and transparent financial infrastructure.
- Policy need:
  - Carefully review new questions and their impact on financial stability.

### Collateral implications of new digital monies
- Concerns:
  - Substantial CBDC or stablecoin demand might absorb a large share of government bonds, affecting the yield curve.
  - Stablecoins whose reserves cannot be lent out could reduce the availability of collateral.
  - Stablecoins fully backed by central bank reserves could immobilize and segregate central bank liquidity that would otherwise be freely lent between banks to satisfy daily payment shocks.
- Recommendation:
  - Thoroughly investigate the degree to which these scenarios are problematic or could be alleviated with apposite policies.

### Competition and market contestability in payments
- Market dynamics:
  - Network externalities favor first entrants or providers with pre-existing networks; Big Techs have a notable advantage.
- Policy questions for authorities:
  - Can interoperability among digital monies or payment networks be mandated, and is it sufficient?
  - Must data portability regulations be enacted, and what might the impact be on market structure?
  - If data is an increasing return to scale input (more data offers marginally more value when stock of data is already high), then data portability may do little to combat market concentration.
  - If breaking down network effects proves inefficient, consider extending regulation developed for other network utilities to the provision of digital money.

### Financial inclusion
- Key statistics:
  - There are one billion registered mobile money accounts across 95 countries.
  - Close to $2 billion transacted through these accounts every day.
  - Mobile money services are available in 96 per cent of countries where less than a third of the population have an account at a formal financial institution.
  - Sub-Saharan Africa accounts for almost half of mobile money accounts worldwide.
- Observations:
  - Mobile money has greatly benefited financial inclusion and often benefited from development of digital identities.
  - The Covid-19 pandemic highlighted benefits of digital financial services but also the risk of leaving some behind; not all services were available to the poor and vulnerable.
- Policy implications:
  - Invest in broader infrastructure and design, and distribute services so they reach everyone.
  - Regulate data use, storage, ownership, transfer, and localization to address tradeoffs between inclusion, risk, and revenue from user data.

### Climate sustainability
- Environmental concerns:
  - Carbon footprint and energy needs of cryptoassets are a rising priority.
  - Researchers at the Cambridge Centre for Alternative Finance estimate that 0.5 percent of total global electricity consumption is attributed to Bitcoin.
  - Some DLT validation technologies (such as proof of work) are environmentally damaging.
- Policy options:
  - Evaluate the carbon footprint of specific digital monies.
  - Standardize methodologies and reporting requirements across countries.
  - Central banks evaluating CBDC could select technology providers based on environmental sustainability, though guidance on how to do so is currently lacking.

### Fiscal policy efficiency and Govtech
- Developments:
  - Digital money is contributing to modernization of public financial management systems to find fiscal space post-Covid.
  - Many countries, especially in Sub-Saharan Africa, have expanded business-to-government and person-to-government payment platforms.
  - Some countries (Bangladesh, Brazil, and Togo) have started to provide social benefits through mobile money to expedite and better target disbursement and fight corruption.
- Conditions for success:
  - Programs require sufficient local capacity and still need more careful study to identify best practices.
- Broader note:
  - Digitalization (Govtech) also transforms tax administration, IT strategies, data analytics, taxpayer e-services, system integrations, risk analysis, compliance, case management, and big data techniques, raising tax design challenges (e.g., taxation of highly digitalized businesses, VAT on cross-border e-commerce, taxation of peer-to-peer economy).

### Macro benefits and evidence
- Evidence cited:
  - Al-Sadiq (2021) suggests moves toward digital money have growth impacts, such as encouraging greater foreign direct investments.
  - Ouedraogo and Sy (2020) point to improved perception of tax officials and government corruption.

### The Fund’s mandate and focus regarding digital money
- Legal and institutional basis:
  - The Fund was established to “promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems” (Article I of the IMF’s Articles of Agreement).
  - The Integrated Surveillance Decision (IMF 2012) requires that in bilateral surveillance the Fund examine policies that can significantly influence balance of payments and domestic stability, including exchange rate, monetary, fiscal, structural, and financial sector policies.
  - The Fund has an obligation to oversee the IMS to ensure its effective operation (Article IV, Section 3(a)).
  - The Fund assists in the establishment of a multilateral system of payments for current transactions (Article 1(iv)) and must consider implications under Article VIII, Sections 2(a) and 3.
- Focus:
  - The Fund will focus on policy implications of digital money for domestic and international economic and financial stability, members’ domestic and balance of payment stability, international economic and financial stability, and the stability and efficiency of the IMS.
  - The Fund will not target technology development, testing, validation, or mainstreaming of new technologies; it will use technological understanding to provide policy advice.
  - The Fund will not focus on topics outside its mandate (e.g., market contestability except insofar as it affects financial stability; other aspects of financial inclusion beyond growth and financial stability implications).

### Core competencies and main activities
- Four core competencies to leverage:
  - Near universal membership: platform to bring together ministries of finance and central banks to discuss spillovers, propose policy solutions, develop a common vision for the IMS, and foster design principles for digital money.
  - Core policy focus on macroeconomic, macrofinancial, exchange rate, and spillover issues at the center of the IMS.
  - Broad expertise: economists, policymakers, technical and technology experts, and lawyers on common projects.
  - Unique ties to member countries through surveillance and capacity development to spur discussions and peer-to-peer learning; relative ease of inviting private sector to discussions.
- Strategic aims:
  - Be an objective and constructive advisor in surveillance, a trusted partner in capacity development, a thought leader in policy development, and potentially ramp up lending to help countries address balance of payments problems from transitions to digital money.

### Surveillance: objectives and concrete actions
- Rationale:
  - 2019 IEO evaluation recommended strengthening financial and macrofinancial analysis in Article IV consultations; digital money heightens urgency.
  - Survey for the Comprehensive Surveillance Review showed increased demand for IMF work on digital finance during Covid-19, especially among emerging markets.
- Concrete surveillance actions:
  - Cover issues stemming from digital money in all core areas of Article IV consultations, with coverage targets:
    - Target to cover one third to a half of countries in about 3 years, starting with the countries most impacted.
    - Target to cover one half to two thirds in 5 years, then gradually expand to all countries.
    - (Numbers are roughly based on internal surveys of mission chiefs; current coverage is very low.)
  - Pilot assessments of payment systems, including CBDC, and related risks in selected FSAPs:
    - About 5 per year over the next 1–3 years, up from about 1-2 per year.
  - More systematically introduce modules into FSAPs as experience is developed and international standards are established:
    - Transitioning to all FSAPs after 5 years.
  - Expand and deepen coverage of digital money implications in the spillover and flagship products, emphasizing inter-relations and tradeoffs between policy objectives.
  - Leverage and influence policy development work to ensure congruence with country needs guiding policy and capacity development advice.

### Capacity development: objectives and concrete actions
- Imperative:
  - The Fund must contribute to narrowing the global digital divide, which is technological and capacity/voice related.
  - Recent internal survey indicates growing demand for capacity development and training in CBDC, payment strategies, digital risk management, legal issues, regulatory and supervisory frameworks including AML/CFT, privately-issued digital money, and digital strategies across all member countries.
- Concrete capacity development actions:
  - Ramp up capacity development and training:
    - Deliver around 50 missions per year from head-quarters and regional technical assistance centers by 3 years from now, then further increase.
    - This intermediate target represents about 1 percent of total IMF missions and is based on internal surveys; current missions are about 10 per year.
  - Provide regional trainings and workshops:
    - Around 1 per quarter.
  - Organize peer-to-peer learning networks with other international organizations for member countries to discuss experiences, pitfalls, lessons, and explore common solutions in rapidly moving areas such as CBDC design and policy implications.
  - Systematically compare cross-country experiences and help spread design and policy lessons of early adopters (such as the Bahamas, Canada, China, the Eastern Caribbean Currency Union, Estonia, Sweden, Singapore, Thailand, and the United Kingdom).
  - Help countries collect and analyze data from pilot projects to inform key policy questions.
  - Create and maintain a strong online presence (IMF web site and social media), highlighting the Fund’s work on digital money and offering resources such as simple explanatory videos.

*Source: ppea2021054 - 64.      As Big Techs gather data, manage customer relations through ubiquitous digital*

### 91.      To provide policy advice through surveillance and build capacity in member countries,

### 91.      To provide policy advice through surveillance and build capacity in member countries,

### Policy development and engagement
- Purpose:
  - Enhance policy frameworks, develop policy lines, and build consensus across membership to provide relevant, innovative, and consistent policy advice.
  - Advance influential policy position papers and engage concretely with national authorities and international working groups to emphasize policy tradeoffs and represent interests of countries not present at the table.
- Recent Fund influence:
  - Open-minded stance on CBDCs in 2018 contributed to a turning of the tide among policymakers.
  - Emphasis on public-private partnerships in 2019 steered policymakers towards more openly working with the private sector.
  - Insistence on the interests of lower-income and emerging market economies and on a multi-pronged approach influenced the G20 Roadmap to enhance cross-border payments.
  - Recent work on legal underpinnings of CBDCs drew significant interest from central banks.
- Actions the Fund would take:
  - Participate more actively in international working groups (about 10 in parallel—note that just the G20 Roadmap comprises 19) to craft common policy recommendations, develop and enhance standards, and bolster legal and regulatory frameworks.
  - Engage more deeply at the Executive Board level, including by discussing Board papers, to help form a common vision, explore solutions, clarify guidance, and solicit feedback.
  - Develop policy positions and analysis in support of surveillance, capacity development, and the global policy agenda and disseminate these internally through reference notes, and externally through Staff Discussion Notes and other channels.
  - More actively coordinate work on digital money within the Fund, including with a lively seminar series to ensure lessons from policy and digital money pilots are rapidly absorbed.
  - Overhaul, redesign, and more actively engage with the high-level advisory board to ensure it has a well-balanced, diverse set of thought leaders, including policymakers, regulators, and entrepreneurs.

### Implementation — Resource needs
- Imperatives:
  - Act swiftly because ramping up capacity takes time and early design and regulation by first-movers will have persistent network effects.
- Preliminary capacity estimate:
  - Rough calculations suggest between 50 and 75 staff and other experts in gross terms.
  - Breakdown:
    - Extending Article IV surveillance to 50 percent of countries and covering most FSAPs requires about 20-30 FTEs.
    - Providing 50 CD missions per year and 4 broader CD engagements per year requires about 15-25 positions (including experts).
    - Policy, analytics and international coordination require 15-20 positions.
  - Resources would be roughly split in equal parts between surveillance, capacity development, and policy development.
  - This magnitude approximately corresponds to the Fund’s current staffing for banking regulation and supervision (about 60 FTEs in MCM, with broader expertise Fund-wide).
- Caveats and follow-up:
  - These initial estimates will be revised following a concrete costing exercise in line with the Board’s guidance.
  - Net resource needs calculations will take into account the existing resource base and potential synergies with existing workstreams and resources, and continuous and active training of staff.
  - Calculations are separate from, but take into account, related work in the Comprehensive Surveillance Review and the FSAP Review on gross needs.
- Reproduced preliminary resource needs estimate table (as presented):
  - Direct Country Engagement
    - Article IVs/FSAPs   20-30
    - CD    15-25
  - Policy, Analytics and Intl Coordination  15-20
- Allocation over time:
  - Initially slightly skewed towards policy development to establish early policy lines.
  - As policy lines are refined and digital money adoption rises, resources would increasingly shift to surveillance.
  - Capacity development would ramp up quickly and remain high to meet growing demand.
  - A step-wise increase in resources dedicated to digital money will remain in place for the longer term.

### Growth plan: hiring and partnering
- Current base:
  - Currently only about 15 FTEs work on digital money related issues, mainly in MCM, ITD, LEG, RES, and SPR.
- Ongoing activities (insufficient scale):
  - Capacity development in CBDC and payment strategies.
  - Occasional fintech-related risk assessments in FSAP pilots (recently for Singapore and Switzerland).
  - Ad-hoc Article IV reviews of digital money implications in early adopters such as China.
  - Participation in international working groups on enhancing cross-border payments with insufficient capacity.
- Hiring priorities (critical mass needed in each area):
  - Macroeconomists and policymakers with a focus on banking, market design, and international economics.
  - Financial sector experts in payment systems, financial market infrastructures, and currency management, including those with private sector experience.
  - A small number of technology and digital risk experts focusing on DLT, networks, smart contracts and wallet design, artificial intelligence, big data, API programming, and cybersecurity.
  - Lawyers with expertise in monetary, central bank, payment system, financial, commercial, insolvency and tax law, AML/CFT frameworks, and legal aspects of digitalization of money and payments.
  - Others, including data specialists and scientists to build new datasets relevant to digital money, and communications experts to help country authorities engage constituencies.
- Recruitment risks and mitigation:
  - Main risk: capacity to find, recruit, attract, and absorb new high-caliber and diverse talent.
  - Growth would occur over several years with opportunities such as rotations of staff from other organizations or central banks.
- Partnerships to complement Fund resources and minimize duplication:
  - BIS Innovation Hub: collaboration on research and development, participation in IMF capacity development, joint discussions of design principles, and a jointly run peer-to-peer learning network.
  - BIS: collaboration on policy work and capacity development, leveraging access to a larger community of central banks.
  - Committee on Payments and Market Infrastructures (CPMI): complementarity on technical standards, regulatory guidance, and interoperability; Fund participation to ensure wider policy implications and representation of countries outside CPMI membership.
  - Financial Stability Board (FSB): coordination on financial stability implications and guidance on stablecoins; collaboration on improving cross-border payments in close cooperation with CPMI, IMF, and World Bank.
  - World Bank: complementarity on development, financial inclusion, remittances, data collection, and technology evolution; collaboration on enhancing the Bank-Fund FSAP program and capacity development in fragile states.

### Conclusion — strategic imperative
- Rapid technological change, private sector innovation, evolving end-user needs, and proactive country authorities are driving digital forms of money to center stage.
- Potential benefits are notable, but significant policy challenges exist and will grow, affecting domestic economic and financial stability and the stability and efficiency of the IMS.
- The Fund’s mandate requires monitoring, advising, and in some cases guiding this transition; the Fund is well positioned given core competencies in surveillance, capacity development, policy development, and lending.
- To tackle increased complexity and pace of change, the Fund needs to:
  - Rapidly increase resources and deepen skills.
  - Strengthen partnerships with complementary organizations while minimizing overlaps and remaining committed to its mandate.

*International Monetary Fund — Excerpt from "The Rise of Digital Money: A Strategic Plan to Continue Delivering on the IMF’s Mandate"*

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_Source: https://www.imf.org/-/media/files/publications/pp/2021/english/ppea2021054.pdf_