{
  "title": "Winds of Change: The Case for New Digital Currency",
  "publication": "IMF News, November 14, 2018",
  "sourceUrl": "https://www.imf.org/en/news/articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency",
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  "summary": "Speech by Christine Lagarde, IMF Managing Director, delivered at Singapore Fintech Festival, November 14, 2018.",
  "authors": [
    "Christine Lagarde"
  ],
  "publishDate": "2018-11-14",
  "sections": [
    {
      "heading": "Introduction",
      "content": "- Speech by Christine Lagarde, IMF Managing Director, delivered at Singapore Fintech Festival, November 14, 2018.\n- Framing: technological change is daunting but brings opportunity; key is to harness benefits while managing risks.\n- Singapore highlighted for regulatory sandbox, Fintech Innovation Lab, and collaboration with major central banks on cross-border payments.\n- Three aims of the speech:\n  - Frame the issue in terms of the changing nature of money and the fintech revolution.\n  - Evaluate the role for central banks in providing digital currency.\n  - Examine downsides and consider how to minimize them."
    },
    {
      "heading": "1. The changing nature of money and the fintech revolution",
      "content": "- Historical context:\n  - Local commerce used metal coins; long-distance trade made carrying coins expensive and risky.\n  - Chinese paper money introduced in the 9th century.\n  - Bills of exchange (Sakks) emerged; trust and state guarantor roles developed.\n- Current digital transformation:\n  - Digitalization recreates a virtual town square via smartphones; data described as the “new gold”.\n  - Expectations of money: more convenient, user-friendly, integrated with social media, available for micro-payments, cheap, and safe.\n  - Cash decline observed in various countries; referenced recent IMF work.\n  - Time horizon question: who will still be exchanging pieces of paper in ten, twenty, thirty years?\n- Pressure on bank deposits:\n  - New specialized payment providers offering e-money: AliPay, WeChat (China), PayTM (India), M-Pesa (Kenya).\n  - Cryptocurrencies (Bitcoin, Ethereum, Ripple) competing for a role with attempts to offer more stable value and quicker, cheaper settlement."
    },
    {
      "heading": "2. A case for Central Bank Digital Currencies",
      "content": "- 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)?\n- Global interest: Canada, China, Sweden, and Uruguay among central banks considering these ideas.\n- IMF action: release of a new paper on pros and cons of central bank digital currency, focusing on domestic effects.\n- Purposes a digital currency could serve:\n  - Could be a liability of the state, like cash today, not of a private firm.\n- Public policy objectives that digital currency could satisfy:\n  - (i) financial inclusion,\n  - (ii) security and consumer protection;\n  - and to provide what the private sector cannot: (iii) privacy in payments.\n- a) Financial inclusion\n  - Potential to reach people and businesses in remote and marginalized regions where banks are not rushing to serve.\n  - Concern: degraded cash infrastructure could leave peripheral populations behind.\n  - Alternative: governments could encourage private sector solutions via funding or infrastructure improvements.\n- b) Security and consumer protection\n  - Digital currency could act as a low-cost, widely available alternative that checks dominant private payment providers.\n  - Private firms may under-invest in security; resilience could suffer with concentrated payment chains.\n  - A digital currency could serve as a backup means of payment and boost competition.\n- c) Privacy\n  - Cash allows anonymous payments for legitimate privacy reasons (avoid hacking, customer profiling).\n  - Central banks would not likely offer fully anonymous digital currency because that would be a bonanza for criminals.\n  - Privacy remains a key rationale for considering state-backed digital options."
    },
    {
      "heading": "3. Downsides of Bank Digital Currencies",
      "content": "- Major downside categories: risks to financial integrity, financial stability, and risks of stifling innovation.\n- Emphasis: face risks creatively through design and technology.\n- a) Risks to financial integrity\n  - Tradeoff between privacy and anti-money laundering/terrorist financing controls.\n  - 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.\n  - Intended outcome: balance user privacy with investigatory capabilities; better for the state relative to cash.\n- b) Risks to financial stability\n  - 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.\n  - Banks can respond by competing with higher interest rates and better services.\n  - Bank run risk exists, but digital currency distribution differs from cash and could reassure depositors.\n  - 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.\n  - Conclusion: “the jury is still out” on whether digital currencies would really upset financial stability.\n- c) Risks to innovation\n  - Central bank dominance in providing full-service digital currency could stifle private-sector innovation.\n  - Alternative: public-private partnership models where:\n    - Banks and financial firms manage customer interface, store wealth, offer interest and loans.\n    - Central bank provides back-end settlement in digital currency.\n  - Potential models:\n    - Financial firms manage the digital currency distribution (similar to current cash distribution).\n    - Individuals hold deposits with firms while transactions settle in central bank digital currency between firms in real time.\n  - 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."
    },
    {
      "heading": "Conclusion",
      "content": "- Summary judgement:\n  - The case for digital currency rests on evolving requirements for money and public policy objectives.\n  - The case is not universal but warrants further investigation—seriously, carefully, and creatively.\n- Broader message:\n  - Embrace and shape technological change so it is fair, safe, efficient, and dynamic.\n  - Reference to the Bali Fintech Agenda launched by the IMF and World Bank last October.\n- Metaphor and call to action:\n  - 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.”\n\nItalicized attribution: Speech by Christine Lagarde, IMF Managing Director, Singapore Fintech Festival, November 14, 2018.\n\n---\n\n\n References\n\n- Christine Lagarde\n- Staff Discussion Note: Casting Light on Central Bank Digital Currency\n- Singapore and the IMF\n- Speeches\n- PRESS CENTER\n- paper\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency"
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    "Authors: Christine Lagarde",
    "Published: November 14, 2018",
    "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:",
    "Historical context:",
    "Current digital transformation:",
    "Pressure on bank deposits:",
    "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:",
    "Public policy objectives that digital currency could satisfy:",
    "a) Financial inclusion",
    "b) Security and consumer protection",
    "c) Privacy",
    "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",
    "b) Risks to financial stability",
    "c) Risks to innovation",
    "Summary judgement:",
    "Broader message:",
    "Metaphor and call to action:",
    "[Christine Lagarde](https://www.imf.org/en/About/senior-officials/Bios/christine-lagarde)",
    "[Staff Discussion Note: Casting Light on Central Bank Digital Currency](https://www.imf.org/en/publications/staff-discussion-notes/issues/2018/11/13/casting-light-on-central-bank-digital-currencies-46233)",
    "[Singapore and the IMF](http://www.imf.org/external/country/SGP/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[paper](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2018/11/13/Casting-Light-on-Central-Bank-Digital-Currencies-46233)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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