## 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](https://www.imf.org/en/news/articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency)

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## Bibliographic details
- Authors: Christine Lagarde
- Published: November 14, 2018

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### 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.*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency_