Winds of Change: The Case for New Digital Currency
IMF News, November 14, 2018
Source details
- Canonical URL
- Winds of Change: The Case for New Digital Currency
Other formats
Bibliographic details
- Authors: Christine Lagarde
- Published: November 14, 2018
Introduction
- Speech by Christine Lagarde, IMF Managing Director, delivered at Singapore Fintech Festival, November 14, 2018.
- Framing: technological change is daunting but brings opportunity; key is to harness benefits while managing risks.
- Singapore highlighted for regulatory sandbox, Fintech Innovation Lab, and collaboration with major central banks on cross-border payments.
- Three aims of the speech:
- Frame the issue in terms of the changing nature of money and the fintech revolution.
- Evaluate the role for central banks in providing digital currency.
- Examine downsides and consider how to minimize them.
1. The changing nature of money and the fintech revolution
- Historical context:
- Local commerce used metal coins; long-distance trade made carrying coins expensive and risky.
- Chinese paper money introduced in the 9th century.
- Bills of exchange (Sakks) emerged; trust and state guarantor roles developed.
- Current digital transformation:
- Digitalization recreates a virtual town square via smartphones; data described as the “new gold”.
- Expectations of money: more convenient, user-friendly, integrated with social media, available for micro-payments, cheap, and safe.
- Cash decline observed in various countries; referenced recent IMF work.
- Time horizon question: who will still be exchanging pieces of paper in ten, twenty, thirty years?
- Pressure on bank deposits:
- New specialized payment providers offering e-money: AliPay, WeChat (China), PayTM (India), M-Pesa (Kenya).
- Cryptocurrencies (Bitcoin, Ethereum, Ripple) competing for a role with attempts to offer more stable value and quicker, cheaper settlement.
2. A case for Central Bank Digital Currencies
- Central question: should central banks issue a new digital form of money (a state-backed token or central bank account available to people and firms)?
- Global interest: Canada, China, Sweden, and Uruguay among central banks considering these ideas.
- IMF action: release of a new paper on pros and cons of central bank digital currency, focusing on domestic effects.
- Purposes a digital currency could serve:
- Could be a liability of the state, like cash today, not of a private firm.
- Public policy objectives that digital currency could satisfy:
- (i) financial inclusion,
- (ii) security and consumer protection;
- and to provide what the private sector cannot: (iii) privacy in payments.
- a) Financial inclusion
- Potential to reach people and businesses in remote and marginalized regions where banks are not rushing to serve.
- Concern: degraded cash infrastructure could leave peripheral populations behind.
- Alternative: governments could encourage private sector solutions via funding or infrastructure improvements.
- b) Security and consumer protection
- Digital currency could act as a low-cost, widely available alternative that checks dominant private payment providers.
- Private firms may under-invest in security; resilience could suffer with concentrated payment chains.
- A digital currency could serve as a backup means of payment and boost competition.
- c) Privacy
- Cash allows anonymous payments for legitimate privacy reasons (avoid hacking, customer profiling).
- Central banks would not likely offer fully anonymous digital currency because that would be a bonanza for criminals.
- Privacy remains a key rationale for considering state-backed digital options.
3. Downsides of Bank Digital Currencies
- Major downside categories: risks to financial integrity, financial stability, and risks of stifling innovation.
- Emphasis: face risks creatively through design and technology.
- a) Risks to financial integrity
- Tradeoff between privacy and anti-money laundering/terrorist financing controls.
- Possible design: authenticate identities through customer due diligence, record transactions, but do not disclose identities to third parties or governments unless required by law; allow law enforcement to lift veil on suspicion.
- Intended outcome: balance user privacy with investigatory capabilities; better for the state relative to cash.
- b) Risks to financial stability
- Digital currencies similar to commercial bank deposits (very safe, held without limit, allow payments of any amount, perhaps even offer interest) could reduce demand for bank accounts.
- Banks can respond by competing with higher interest rates and better services.
- Bank run risk exists, but digital currency distribution differs from cash and could reassure depositors.
- If depositors run to foreign assets, they may also shun digital currency; liquid and safe assets (for example, mutual funds that only hold government bonds) exist in many countries.
- Conclusion: “the jury is still out” on whether digital currencies would really upset financial stability.
- c) Risks to innovation
- Central bank dominance in providing full-service digital currency could stifle private-sector innovation.
- Alternative: public-private partnership models where:
- Banks and financial firms manage customer interface, store wealth, offer interest and loans.
- Central bank provides back-end settlement in digital currency.
- Potential models:
- Financial firms manage the digital currency distribution (similar to current cash distribution).
- Individuals hold deposits with firms while transactions settle in central bank digital currency between firms in real time.
- Advantages: immediate, safe, cheap, potentially semi-anonymous payments; central bank retains payment system footing; level playing field for competition; platform for innovation; private sector focuses on user experience.
Conclusion
- Summary judgement:
- The case for digital currency rests on evolving requirements for money and public policy objectives.
- The case is not universal but warrants further investigation—seriously, carefully, and creatively.
- Broader message:
- Embrace and shape technological change so it is fair, safe, efficient, and dynamic.
- Reference to the Bali Fintech Agenda launched by the IMF and World Bank last October.
- Metaphor and call to action:
- Follow progress and courage embodied by a “fearless” young girl as a symbol of moving forward: “Let us sail ahead. I am not afraid. (pause) I, am not afraid.”
Italicized attribution: Speech by Christine Lagarde, IMF Managing Director, Singapore Fintech Festival, November 14, 2018.