## Public and Private Money Can Coexist in the Digital Age _IMF Blog, February 18, 2021_ ## Source details **Canonical URL:** [Public and Private Money Can Coexist in the Digital Age](https://www.imf.org/en/blogs/articles/2021/02/18/blog-public-and-private-money-can-coexist-in-the-digital-age) ## Other formats - [Markdown version](/en/blogs/articles/2021/02/18/blog-public-and-private-money-can-coexist-in-the-digital-age/index.md) - [Structured JSON version](/en/blogs/articles/2021/02/18/blog-public-and-private-money-can-coexist-in-the-digital-age/index.json) - [Bundle manifest](/en/blogs/articles/2021/02/18/blog-public-and-private-money-can-coexist-in-the-digital-age/bundle-manifest.json) ## Bibliographic details - Authors: Tobias Adrian, Tommaso Mancini-Griffoli - Published: February 18, 2021 --- ### Overview and authorship - Title: Public and Private Money Can Coexist in the Digital Age - Authors: Tobias Adrian, Tommaso Mancini-Griffoli - Date: February 18, 2021 ### Dual monetary system: structure and advantages - Today’s world is characterized by a dual monetary system: privately-issued money built upon a foundation of publicly-issued money by central banks. - Advantages of the dual system: - Innovation and product diversity, mostly provided by the private sector. - Stability and efficiency, ensured by the public sector. - Tradeoff: innovation and diversity vs. stability and efficiency — more of one usually means less of the other. - Policy choice for countries (especially central banks): how much to rely on the private sector versus how much to innovate themselves; dependent on preferences, available technology, and the efficiency of regulation. ### Public-private coexistence: mechanics and rationale - Fundamental symbiotic relationship: private money’s option to redeem into perfectly safe and liquid public money (notes and coins or central bank reserves) underpins stability. - Key mechanisms and enablers: - Redemption at a fixed face value into central bank currency makes private monies a stable store of value. - Sound regulation and supervision, government backstops such as deposit insurance and lender last resort, and partial or full backing in central bank reserves. - Redemption enables interoperability: transfers between different banks are settled via central bank currency that both banks trust and hold. - Interoperability spurs competition, innovation, and diversity of money forms. - Conclusion: the option of redemption into central bank currency is essential for stability, interoperability, innovation, and diversity; a system with only private money would be too risky, and one with only central bank currency could miss important innovations. ### Central bank currency in the digital age: pressures and technological challenges - Uncertainty about whether central bank digital currencies (CBDCs) will displace privately-issued money or allow it to flourish depends on central banks’ ability and willingness to consistently and significantly innovate. - CBDCs analogies and implications: - CBDCs are akin to both a smart-phone and its operating system: settlement technology (bits transferred) and a form of money (functionality and appearance). - Central banks would need to act more like Apple or Microsoft to keep CBDCs at the technology frontier and in users’ wallets. - Technological dynamics: - CBDCs may be managed from a central database initially, but might migrate to distributed ledgers as technology matures. - Major ledger technologies may change following advancements, requiring frequent architectural redesigns. - User needs and expectations will evolve quickly and unpredictably; new transfer modalities (e.g., automated transfers by chips embedded in products) may demand new money features. - Supply-side pressures: - Private sector will continue to innovate with new eMoney and stablecoin schemes. - Regulators will seek to contain risks while questions arise about interaction between private digital monies and CBDCs. ### Partnership opportunities with the private sector - Central banks need not be alone; CBDC design can encourage private-sector innovation on top of it. - Design tools and possibilities: - Open application programming interfaces (APIs) could enable a developer community to expand CBDC usability beyond plain e-wallets. - Example add-on services: automated payments (pay-on-receipt), look-up functions to send money using phone numbers. - Vetting add-on services for safety will be essential. - Coexistence and synthetic/digital private monies: - Some central banks may allow other forms of digital money to co-exist, leveraging CBDC settlement functionality and stability—analogous to parallel operating systems. - A private digital money would be a stable store of value if redeemable into central bank currency (digital or non-digital) at a fixed face value, achievable if fully backed by central bank currency. - It would be an efficient means of payment if settlement is immediate on its network and networks are interoperable through corresponding moves of central bank currency. - This form of digital money (previously called synthetic currency) could co-exist with CBDC under a licensing arrangement and regulatory framework that fulfills public policy objectives: - Operational resilience - Consumer protection - Market conduct and contestability - Data privacy - Prudential stability - Financial integrity could be ensured via digital identities and complementary data policies; partnering with central banks requires a high degree of regulatory compliance. ### Policy implications and country choices - If countries adopt CBDCs, they should consider leveraging the private sector to keep pace with technological change and user needs. - The dual-monetary system can be extended to the digital age: - Central bank currency, regulation, supervision, and oversight remain essential to anchor stability and efficiency. - Privately-issued money can supplement the foundation with innovation and diversity—potentially even more than today. - Final policy note: where central banks position themselves along the continuum between private-sector and public-sector provision of money will vary by country and ultimately depend on preferences, technology, and the efficiency of regulation. ### Engagement - The authors invite reader feedback via a 3-question survey on IMFBlog. *IMF Blog post by Tobias Adrian and Tommaso Mancini-Griffoli, February 18, 2021.* --- ## References - [in the past](http://blogs.imf.org/2019/09/26/from-stablecoins-to-central-bank-digital-currencies/) _Source: https://www.imf.org/en/blogs/articles/2021/02/18/blog-public-and-private-money-can-coexist-in-the-digital-age_