Privacy Provision, Payment Latency, and Role of Collateral

IMF Working Papers, July 31, 2020

Source details

The paper examines shifts in the boundary between publicly and privately provided payments systems and the evolving role of collateral.
Recent technological developments make it feasible to contemplate abolishing physical cash and replacing it with electronic alternatives such as digital tokens.
Focus areas:
- Privacy provision: increased awareness of and concern with privacy problems in payments systems.
- Payment latency: how fintech developments are likely to reduce counterparty and interest rate risk for corporate treasurers.
The paper ties privacy provision and payment latency through the lens of collateral, emphasizing the analogy of collateral reuse and digital tokens.

Digital tokens present a feasible electronic alternative to physical cash.
Privacy provision in payments systems raises heightened awareness and concern about privacy issues.
Reduced payment latency in the fintech environment can lower counterparty risk and interest rate risk faced by corporate treasurers.
Collateral plays a central role in linking privacy provision and payment latency, with an important analogy between collateral reuse and digital tokens.

Policymakers and markets should consider implications of replacing physical cash with electronic alternatives for privacy and collateral management.
Design choices for payments systems and digital tokens need to account explicitly for:
- Privacy provision and related user concerns.
- Effects on payment latency and consequent counterparty and interest rate risk.
- Operational and regulatory aspects of collateral reuse in a tokenized environment.