{
  "title": "New Forms of Digital Money: Implications for Monetary and Financial Stability",
  "publication": "IMF News, October 30, 2020",
  "sourceUrl": "https://www.imf.org/en/news/articles/2020/10/30/sp103020-new-forms-of-digital-money",
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  "summary": "Remarks by IMF Deputy Managing Director Tao Zhang, CAFIN Webinar Series on “Financial Risks, Innovation and Inclusion in a Post-COVID” World, October 30, 2020.",
  "publishDate": "2020-10-30",
  "sections": [
    {
      "heading": "Context and motivation: cross-border payments and COVID-era vulnerabilities",
      "content": "- Remarks by IMF Deputy Managing Director Tao Zhang, CAFIN Webinar Series on “Financial Risks, Innovation and Inclusion in a Post-COVID” World, October 30, 2020.\n- Cross-border payments are central to the international monetary system and affect the most vulnerable populations.\n- Key facts:\n  - Remittances still cost 7 percent on average, more than twice the target set by the U.N. Sustainable Development Goals.\n  - Correspondent banks—those providing access to cross-border payments—are 22 percent fewer since 2011.\n  - 1.7 billion people worldwide are unbanked.\n- COVID-era impact concentrated in countries with:\n  - a higher share of unbanked population,\n  - greater reliance on remittances,\n  - lower access to correspondent banks,\n  - less liquid foreign exchange markets.\n- Persistent frictions: slowness, opacity, high costs, inaccessibility, and collective-action underinvestment in interoperability and cross-border public goods."
    },
    {
      "heading": "What are CBDCs and global traction",
      "content": "- Definition: CBDCs are a digital form of fiat money issued by a central bank. Retail CBDCs are defined as a widely accessible digital form of central bank fiat money that is legal tender.\n- Two variations of CBDC prototypes—wholesale and retail (general purpose)—discussion limited to retail CBDCs.\n- Adoption status and experiments:\n  - No central bank has issued a retail CBDC at the time of the speech, but pilots underway in the Bahamas, the Eastern Caribbean, China, Sweden, and Uruguay.\n  - Some countries (the United States, Canada, Australia) are undertaking experiments as contingency.\n  - Recently, seven advanced economy central banks, including the U.S. Federal Reserve, issued a report articulating views on fundamental principles and core features of CBDC design.\n- Rationale for cross-border CBDC use:\n  - Potential to lower transaction costs and increase accessibility/financial inclusion.\n  - Can be designed as a direct claim on the issuing central bank or as digital cash transferable peer-to-peer without going through a bank.\n  - Bilateral experiments demonstrate feasibility for cross-border payments."
    },
    {
      "heading": "Three scenarios for CBDC adoption in cross-border payments",
      "content": "- Scenario 1: Niche use for cross-border payments\n  - CBDC used for small-value transactions (e.g., remittances) due to low cost and efficiency or legal/regulatory limits.\n  - CBDC not held long; exchanged for local currency for domestic purchases; does not supplant local unit of account.\n- Scenario 2: Greater currency substitution in some countries\n  - Foreign CBDC pegged to an existing fiat currency induces greater use in countries with high and volatile inflation and unstable exchange rates.\n  - CBDC replaces domestic currency significantly: as a store of value, as a means of payment for many transactions, and as a common unit of account.\n- Scenario 3: Global adoption with multi-polarity\n  - Competition between a few major CBDCs representing independent units of account.\n  - Emergence of “currency blocs” within which countries choose one common CBDC for international and domestic transactions."
    },
    {
      "heading": "Macro-financial impacts across four areas",
      "content": "- Overview: Impacts concentrated in monetary policy; financial stability; capital flow management; and the international monetary system.\n\n- 1) Monetary policy\n  - Primary concern: currency substitution/dollarization reducing monetary policy transmission.\n  - Currency substitution limits monetary authorities' control over domestic liquidity.\n  - CBDCs could enable faster and larger-scale substitution than traditional dollarization due to convenience and accessibility.\n  - If CBDCs used mainly for specific international transactions (e.g., remittances), direct impact may be limited, but indirect effects could arise if reduced transaction costs increase remittance flows.\n  - Empirical illustration: In Cambodia, U.S. dollar usage rose rapidly within a few years as large foreign aid flows provided ample dollar liquidity; dollars migrated from payments to store of value.\n  - If countries with weak fundamentals grant legal tender status to foreign CBDCs, monetary policy effectiveness could be significantly eroded.\n  - Multipolarity (Scenario 3) implications:\n    - Depend on whether multipolarity forms country currency blocs or currency competition within each country.\n    - Could complicate exchange rate anchoring and require monitoring of several exchange rates and frequent price adjustments.\n  - External demand for an issuing-country’s CBDC could complicate monetary policy in the issuing country if it results in large capital flows, particularly where financial markets are shallow relative to the economy.\n\n- 2) Financial stability\n  - Effects depend on CBDC design, scale of adoption, and financial system structure.\n  - Greater currency substitution induced by foreign CBDCs could add pressures on funding and solvency risks beyond those in partially “dollarized” economies.\n  - CBDCs could increase substitution where foreign-currency frictions are reduced.\n  - Concerns include potential disintermediation in normal times and higher “run risks” in stress periods in issuing countries.\n  - IMF staff view: such effects depend on CBDC features and can be mitigated by design choices.\n  - In Scenario 3, currency competition within a jurisdiction could make local financial conditions more volatile; low switching costs could destabilize participation in currency blocs or digital currency areas.\n  - Competition could also foster monetary discipline to maintain currency attractiveness over time.\n\n- 3) Capital flow management / Capital account restrictions\n  - Capital flow management measures and capital account restrictions could be circumvented by CBDCs, intensifying the “policy trilemma”: inability to have at the same time a fixed foreign exchange rate, free capital movement, and an independent monetary policy.\n  - CBDCs could complicate monetary and exchange rate policy conduct.\n  - Conversely, CBDCs might allow greater control of capital flows depending on design and issuer–recipient cooperation.\n\n- 4) International monetary system\n  - Forecasting evolution of the international monetary system with CBDCs is difficult; changes likely slow because reserve currency adoption typically requires structural institutions: policy credibility, rule of law, and deep liquid markets.\n  - Longer-term possibilities:\n    - Widely available CBDCs and strong network externalities could accelerate shifts in reserve currency status.\n    - Digitalization could reshape demand for and supply of safe assets.\n    - Uneven technological advances, alternative cross-border payment “rails,” or shifts to trade-invoicing and financial intermediation denominated in a CBDC or global stablecoin could reposition reserve currencies.\n    - New digital platforms could emerge at global scale and offer alternative networks that CBDCs may tap to spur adoption.\n  - Reserve implications by scenario:\n    - Scenario 1 (niche adoption): limited implications for reserves; CBDC serves as payment conduit and would not change unit of account of trade and financial transactions.\n    - Scenario 2 (greater substitution): central banks may increase foreign reserves for precautionary motives; reserve holders may shift into the CBDC unit of account; faster roll-out of CBDCs might lower inertia in reserve holdings.\n    - Confidence in reserve issuers (e.g., cybersecurity, emergency liquidity provision) remains crucial.\n    - Supply-side: issuers’ incentives to supply more safe assets vary; lack of accommodation could lead to shortage of safe assets, depressed risk premiums, and higher leverage.\n    - Scenario 3 (competition among a few widely adopted CBDCs): reserve holdings could diversify; many reserve issuers yields high total issuance but low individual issuance protecting domestic stability; conversely, few issuers worsens coordination and may cause instability through rapid substitution across reserve assets.\n    - Multipolar outcomes: reserve composition could be diversified between or within countries depending on currency bloc formation or within-country currency competition.\n  - Broader payment ecosystem effects:\n    - Cross-border CBDC issuance could reduce demand for correspondent banking services and SWIFT international financial messaging and payment systems as countries transact separately."
    },
    {
      "heading": "Policy challenges and design considerations (drawn from international discussions)",
      "content": "- Realize benefits of CBDCs while mitigating risks requires attention to:\n  - CBDC design features (to limit disintermediation, manage run risks, and control substitution).\n  - Interoperability and public-goods investments across borders to address collective-action problems.\n  - Coordination among issuers and recipient countries to manage capital flow, reserve, and monetary policy implications.\n  - Ensuring policy credibility, cybersecurity, and mechanisms for emergency liquidity to preserve confidence in reserve issuers.\n\nRemarks by IMF Deputy Managing Director Tao Zhang, October 30, 2020.\n\n---\n\n\n References\n\n- Tao Zhang\n- United States and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2020/10/30/sp103020-new-forms-of-digital-money"
    }
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    "Published: October 30, 2020",
    "Remarks by IMF Deputy Managing Director Tao Zhang, CAFIN Webinar Series on “Financial Risks, Innovation and Inclusion in a Post-COVID” World, October 30, 2020.",
    "Cross-border payments are central to the international monetary system and affect the most vulnerable populations.",
    "Key facts:",
    "COVID-era impact concentrated in countries with:",
    "Persistent frictions: slowness, opacity, high costs, inaccessibility, and collective-action underinvestment in interoperability and cross-border public goods.",
    "Definition: CBDCs are a digital form of fiat money issued by a central bank. Retail CBDCs are defined as a widely accessible digital form of central bank fiat money that is legal tender.",
    "Two variations of CBDC prototypes—wholesale and retail (general purpose)—discussion limited to retail CBDCs.",
    "Adoption status and experiments:",
    "Rationale for cross-border CBDC use:",
    "Scenario 1: Niche use for cross-border payments",
    "Scenario 2: Greater currency substitution in some countries",
    "Scenario 3: Global adoption with multi-polarity",
    "Overview: Impacts concentrated in monetary policy; financial stability; capital flow management; and the international monetary system.",
    "1) Monetary policy",
    "2) Financial stability",
    "3) Capital flow management / Capital account restrictions",
    "4) International monetary system",
    "Realize benefits of CBDCs while mitigating risks requires attention to:",
    "[Tao Zhang](https://www.imf.org/en/About/senior-officials/Bios/tao-zhang)",
    "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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