As Central Banks explore blockchain opportunities to deepen, advance and reform payments systems, the International Monetary Fund (IMF), admitted a widespread adoption of a foreign Central Bank Digital Currency (CBDC) or stable coin could substantially compromise the effectiveness of domestic monetary tools.
The Fund shared the concern in ‘Behind the Scenes of Central Bank Digital Currency Emerging Trends, Insights and Policy Lesson’, a report it released yesterday.
It noted that CBDC would serve as alternative payment options, helping to bridge gaps in existing payment order but also highlighted pitfalls central banks must look for in design and implementation.
“While currency substitution has long been a risk facing countries, it is possible that new forms of digital currency might have a competitive advantage relative to older forms of currencies. If a sufficiently large portion of a country’s population adopts a foreign digital currency or a global stablecoin, the ability of the country to carry out several crucial central bank functions might be impaired, such as monetary policy and lender of last resort,” it noted.
In an earlier report on the emerging trend, The Guardian had highlighted that weaker countries faced currency imperialism challenges.
The report had highlighted the ambitions of technologically-advanced countries such as China to renew their currency interanationalisation agenda through CBDC deployment.
The IMF’s latest report highlighted that the old fiat currency competition could be more intense in the coming years as more countries embrace CBDCs. The report noted that the People’s Bank of China (PBOC) had made it clear that a “motivation for investigating CBDC was to secure monetary sovereignty in a digital future”.
IMF Managing Director, Kristalina Georgieva, in a separate statement in her speech at a forum of the Atlantic Council in Washington DC, said about 100 countries are at different stages of CBDC development.
The speech on ‘The Future of Money: Gearing up for Central Bank Digital Currency’ highlighted specific factors central banks should consider in the design and implementation of digital currencies, which the IMF boss said would “offer more resilience, more safety, greater availability, and lower costs than private forms of digital money”.
“We have moved beyond conceptual discussions of CBDCs and we are now in the phase of experimentation. Central banks are rolling up their sleeves and familiarizing themselves with the bits and bytes of digital money.
“These are still early days for CBDCs and we don’t quite know how far and how fast they will go. What we know is that central banks are building capacity to harness new technologies – to be ready for what may lie ahead,” she said.
Drawing from the experiences of frontline central banks (including that of China and Sweden) in the new trend, Georgieva pointed out three key takeaways. She libeled them as no one size fits all; financial stability and privacy considerations are paramount to the design and the need to achieve balance.
“In some cases, a CBDC may be an important path to financial inclusion—for instance, where geography is an obstacle to physical banking. In others, a CBDC could provide an essential backup in the event that other payment instruments fail. One such case was when the Eastern Caribbean Central Bank extended its CBDC pilot to areas struck by a volcanic eruption last year. So, central banks should tailor plans to their specific circumstances and needs,” she told her audience.