Digital Technology: How It Could Transform the International Monetary System
IMF News, June 30, 2021
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- Published: June 30, 2021
Overview
- Remarks by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF, at the 29th International Financial Congress convened by the Bank of Russia on June 30, 2021.
- Context: digitalization is transforming the concept and operation of currency through private-sector innovations (cryptoassets, stablecoins) and public-sector initiatives (the Bahamas’ “Sand Dollar”, China’s “digital yuan”).
- Scope: focus on Central Bank Digital Currencies (“CBDC”), their benefits, risks, design options to constrain risks, and implications of cryptoassets and stablecoins for the international monetary system.
- IMF relevance: many of the Fund’s 190 member countries are exploring CBDC in various stages (analysis, prototyping in sandbox environments, live pilots or issuance).
CBDC — Top three benefits
- Cost-effectiveness, competition, and resilience improvements:
- Potential to reduce the cost of managing physical cash, notably in countries with vast land mass or many islands.
- By offering a low-cost alternative, CBDC can help discipline highly concentrated payment markets.
- CBDC could improve resilience via an alternate decentralized platform.
- Financial inclusion:
- In countries with large numbers of unbanked people, CBDC could enhance inclusion, especially when paired with digital identification systems.
- Access to payments is often the first step toward broader financial participation; micro-payment data can enable access to credit.
- Cross-border payments:
- CBDC could improve speed, cost, and accessibility of cross-border payments by enabling more direct trading if common technical standards, data and compliance requirements exist.
- The IMF is collaborating with the Bank for International Settlements, the Committee on Payments and Market Infrastructures, and the Financial Stability Board to establish relevant guidelines.
CBDC — Top three risks
- Banking-sector disintermediation:
- Deposits could be withdrawn from commercial banks if people hold significant volumes of CBDC, leading banks to raise interest rates on deposits, offer better payment services, compress margins, or charge higher loan rates.
- Reputational risks for central banks:
- Central banks would need to operate across the payments value chain (customer interfaces, wallets, technology selection and maintenance, transaction monitoring, AML processes); failures (technological glitches, cyber-attacks, human error) could undermine public faith.
- Macro-financial risks from cross-border CBDC use:
- CBDC of reserve-currency countries available across borders could increase currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates.
Design options to reduce CBDC risks
- Interest and holding limits:
- CBDC holdings could offer a lower rate of interest — if any — than the policy rate.
- Holdings could be capped, with surplus funds swept into bank accounts every night.
- Transaction and distribution measures:
- Transaction limits could be imposed to reduce bank disintermediation risk.
- CBDC could be distributed through existing financial institutions using current customer onboarding processes.
- Cross-border constraints:
- Countries could limit holdings by non-citizens to restrain currency substitution.
- Capital-flow-management measures could be embedded in CBDC specifications to restrict certain cross-border transactions.
- Programmability and reserve management:
- The programmability of CBDC could facilitate regional pooling and sharing of reserves and their disbursement.
Cryptoassets and stablecoins — characteristics and contrasts with CBDC
- Cryptoassets:
- Digital representations of value; privately issued; secured by cryptography; leverage decentralized ledger technology enabling peer-to-peer transactions without an intermediary.
- Examples like Bitcoin are not backed by official government assets and exhibit very volatile prices.
- Stablecoins:
- Issued by a legal entity; attempt price stability by linking value to a fixed asset (fiat currency or commodities).
- Current scale and potential:
- The share of cryptoassets and stablecoins relative to money supply (“M1”) is currently small; their present impact on monetary and financial systems is limited.
- Adoption could increase rapidly, especially as cryptoassets attract institutional investors and BigTech-issued stablecoins leverage large cross-border user bases.
- Potential systemic implications if adoption widens:
- Widespread currency substitution could undermine monetary policy control and affect domestic financial conditions.
- Capital Flow Measures (CFM) could be more easily circumvented; independent exchange-rate regimes harder to maintain.
- Capital-flow volatility and gross foreign-asset positions could increase, risking balance-of-payments problems.
- Global stablecoins in their own denomination raise risks including lack of available safe assets and a credible safety net.
- Risk of fragmentation and a global “digital divide”; however, CBDC could offer opportunities for greater payment-system integration.
Principles and policy recommendations
- Fundamental stabilizing factors to preserve:
- Continued reliance on rules and conventions covering monetary and exchange-rate arrangements, cross-border payments for capital-account transactions, capital flows and related management measures.
- Continued reliance on mechanisms for balance-of-payments adjustments and a global safety net (including IMF financing).
- Robust institutions to enforce rules and mechanisms.
- Regulatory and design imperatives:
- Digital money must be regulated, designed, and provided so that countries maintain control over monetary policy, financial conditions, capital-account openness, and foreign-exchange regimes.
- Payment systems should grow increasingly integrated — not fragmented — and must work for all countries to avoid a “digital divide”.
- Reserve-currency configurations and backstops should evolve smoothly.
- Approach to private digital money:
- Private issuers of digital money must operate within clear legal frameworks defining whether instruments are deposits, securities, or commodities.
- Regulations must address financial stability, financial integrity, consumer protection, and market contestability.
- Private forms of digital money and CBDC are likely to coexist; private solutions can build functionality on top of CBDC and possibly accept CBDC in exchange for private payment tokens.
Cooperation and governance
- Central-bank cooperation is pivotal to:
- Build CBDC features that contain spillovers and facilitate backstops.
- Explore measures to curb currency substitution (e.g., limiting CBDC transactions and holdings for foreigners or allowing foreign jurisdictions to impose such limits).
- Integrate capital-flow-management options into CBDC design where appropriate.
- Policy stance toward cryptocurrencies and stablecoins:
- A great deal of patience and skepticism is warranted given high stakes for international financial stability.
- The objective is to design CBDC to support a stable and efficient international monetary system, not to replace the system with a CBDC-based global system.
Closing assessment
- The evolution of money presents both opportunities and risks. If digital currencies are designed with caution, precision, and within robust legal and regulatory frameworks, they could deliver transformative benefits while minimizing risks.
- The future likely features a continuum of monetary instruments — public and private — operating side-by-side within a clear regulatory perimeter.
Remarks by Tobias Adrian, 29th International Financial Congress, June 30, 2021.