New Framework for the Digital Economy: IIF Digital Bretton Woods Forum with London Stock Exchange Group - Speech by Tobias Adrian
IMF News, April 20, 2022
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- Published: April 20, 2022
Overview
- Speaker: Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF.
- Event: IIF Digital Bretton Woods Forum with London Stock Exchange Group.
- Date: April 20, 2022.
- Focus: Current and future landscape of digital currencies, in particular central bank digital currencies (CBDCs), and crypto assets including stablecoins; opportunities for global standards and coordination to narrow regulatory gaps.
The changing nature of money — CBDCs
- Current CBDC adoption and activity:
- "Only two countries have officially launched CBDCs: the Bahamas and Nigeria."
- "Many more are actively running trials, including China and the countries of the Eastern Caribbean Currency Union."
- "More than 100 countries are exploring the idea."
- "In the United States, the Federal Reserve issued a paper in January on the pros and cons of CBDCs as a first step of a public discussion among stakeholders."
- Motivations and approaches:
- Approaches differ by country circumstance: some cautiously analyzing policy motives; a few prototyping in sandboxes or launching live pilot programs.
- Potential benefits of CBDCs (enumerated):
- Enhance payment systems: "more cost-effective due to the digital nature; more competitive by disciplining often highly concentrated payment markets; and more resilient with an alternative decentralized platform."
- Increase financial inclusion: "Access to payments is often the first step toward greater participation in the financial system, and the digital availability of micro-payment data could lead to access to credit and other financial services for people who currently lack access."
- Improve cross-border payments: "By sharing common technical standards and data and compliance requirements, CBDCs could allow for cross-border trading between intermediaries or end-users directly."
- Key risks highlighted (three main risks):
- "Banking-sector disintermediation. If people decide to hold a CBDC in significant volume, it could lead to a compression of bank margins or to an increase in lending rates, resulting in contraction in credit to the economy."
- "Reputational risks for central banks. If problems occur—whether it is due to technological glitches, cyber-attacks, or simply human error—it could undermine public faith in the central bank’s operations."
- "Macrofinancial risks. With the cross-border use of CBDCs, countries with weak institutions, high inflation, and volatile exchange rates could see an increase in currency substitution (so-called “dollarization”)."
- Design and cooperation measures to mitigate risks:
- Design options: "offering a lower interest rate on CBDC holdings, or distributing CBDC through existing financial institutions."
- International cooperation: "Cooperation among central banks will also be pivotal in building CBDCs with features that help contain spillovers and help facilitate backstops."
- Specific cross-border mitigation features:
- "To curb currency substitution, countries could explore the option of limiting transactions and holdings for foreigners. Or, they could allow foreign countries to introduce such limits on their own territory."
- "Capital-flow-management measures, which might involve restrictions on certain cross-border transactions, could be built directly into the CBDC specification."
- "The programmability of CBDC could also be used to facilitate a more efficient exchange of currencies across borders."
Alternative digital assets — cryptoassets and stablecoins
- Cryptoasset landscape and scale:
- "Since Bitcoin’s launch in 2009, over 14,000 different types of cryptoassets have been issued, holding an estimated market value of US$2.6 trillion at the end of 2021."
- Characteristics: "highly volatile, infrequently accepted, and carry a high transaction cost."
- Stablecoins:
- Purpose: "attempt to offer price stability by linking their value to a fixed asset such as US dollars or gold."
- Diversity: "there are many stablecoins with various shades of stability."
- Potential: "Unlike unbacked cryptoassets, stablecoins have the potential to become global payments instruments."
- Coexistence and systemic implications:
- "Along with CBDCs, both unbacked crypto and stablecoins are eventually likely to come to exist side-by-side on a new continuum, competing with today’s two most common forms of money, namely cash and bank deposits."
- Growth trajectory: "Unbacked crypto and stablecoin use is still relatively small, but both are growing rapidly and could soon start having significant implications for the international monetary system."
- Risks if widely adopted (enumerated):
- "Widespread currency substitution, or what we have called “cryptoization,” could potentially undermine governments’ control of monetary policy and have an impact on domestic financial conditions."
- "Capital flow measures could be more easily circumvented and independent exchange-rate regimes could be harder to maintain."
- "Capital-flow volatility could increase, as could gross foreign-asset positions, potentially triggering balance-of-payments problems."
- "Global stablecoins in their own denomination raise significant new risks, including the lack of available safe assets and a credible safety net."
- "Risk of fragmentation of payment systems, and of global “digital divide” — stemming from differences in countries’ access to new payment technologies and their capacity to leverage and regulate it."
- Policy implication: "Such risks underscore why we now need comprehensive international standards that more fully address risks to the financial system from crypto assets, their associated ecosystem, and their related transactions, while allowing for an enabling environment for useful crypto asset products and applications."
Closing regulatory gaps — supervision, legal frameworks, and IMF role
- Challenges with national approaches:
- Cross-sector and cross-border nature of crypto limits national effectiveness; "many activities are unregulated."
- "Crypto’s cross-sector and cross-border remit limits the effectiveness of national approaches."
- "Many crypto service providers operate across borders, making the task for supervision and enforcement more difficult. Uncoordinated regulatory measures may facilitate potentially destabilizing capital flows."
- Principles for regulation and supervision (enumerated):
- Private issuers of digital money should meet the same safeguards as existing private money: close supervision, government backstops, and clear legal/regulatory frameworks.
- Stablecoins and other private digital money should address risks to "financial stability, financial integrity, consumer protection, and market contestability."
- "Clear legal frameworks must be developed to determine whether these stablecoins are (for example) deposits, securities or commodities."
- Entities performing core functions across the crypto ecosystem (wallets, exchanges) should be "authorized and licensed."
- Regulated institutions exposed to crypto assets should face "appropriate prudential treatment of those exposures."
- Regulation should be "globally comprehensive, consistent, and coordinated."
- IMF strategy and cooperation:
- "The IMF has developed a strategy in order to continue to deliver on its mandate in the digital age."
- The Fund will "work closely with the Financial Stability Board and other members of the international regulatory community to develop an effective regulatory approach to crypto assets."
Key statistics and precise references (verbatim)
- "Only two countries have officially launched CBDCs: the Bahamas and Nigeria."
- "More than 100 countries are exploring the idea."
- "In the United States, the Federal Reserve issued a paper in January on the pros and cons of CBDCs..."
- "Since Bitcoin’s launch in 2009, over 14,000 different types of cryptoassets have been issued, holding an estimated market value of US$2.6 trillion at the end of 2021."
Speech by Tobias Adrian, IIF Digital Bretton Woods Forum with London Stock Exchange Group, April 20, 2022.