By Larry White
A thank to a reader who pointed me to this new article in Centralbanking.com. In our previous article on cryptocurrencies, we raised some questions about the future. This new IMF paper may give us some hints as to how the existing monetary authorities view cryptocurrencies. Below are a few excerpts and then a few added comments.
“Central bank digital currency (CBDC) could increase the efficiency of current payment infrastructure while reducing costs to central banks, a paper published by the International Monetary Fund has said.
In the paper, published in June, the fund examines how digital technology has thus far transformed the financial services landscape in an attempt to understand what challenges consumers and regulators could face in the future.
The paper focuses on distributed ledger technology (DLT) and the role it can play in cross-border payments. In a separate appendix, the fund seems to come out in favour of central banks creating and issuing their own digital currencies.
“Introducing a CBDC may allow the central bank to perform its role in insuring an effective payments infrastructure, including the issuance of currency and the provision of a lender of last resort function, more efficiently,” the authors argue.
While acknowledging there are several examples where payment systems have become more efficient without the assistance of digital currency, the IMF suggests CBDCs could “narrow the shortcomings” of the payment space.
The economists argue CBDCs could overcome co-ordination failures or the inability to agree on a single new technology standard while also helping to topple private virtual currencies, which the fund believes hold a “monopoly of power” in the payment system landscape.
“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy,” the authors explain. “A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system.”
The authors acknowledge a CBDC would also result in the eventual phasing out of hard cash, but with the benefit of savings on the costs of maintaining and replacing notes and coins.
Such a move to central bank electronic currency would ultimately help “significantly reduce” transaction costs for individuals and small enterprises which have little or no access to banking services… “
My added comments: This article is filled with information related to topics we have covered here. Lets take a quick look at some of them.
In our previous article we asked these questions:
“If we do get another major global financial crisis that will be another factor to consider. Does that drive millions (or tens of millions if its really bad) more people to look outside the banking system due to lost confidence? If so, do they move into things like Bitcoin or more traditional safe havens like gold and silver? How would the central banks respond to all that? Try to crush alternatives to their currencies? Try to compete with their own versions?”
Does this IMF paper suggest the central banks view the cryptocurrencies as problematic and something they need to push into a “secondary role in the payments system?” The article linked above that quotes the IMF paper clearly appears to say that. It also seems to suggest the idea of central bank digital currencies as a state backed competitor to existing private cryptocurrencies with one goal being to “forestall such private currencies”.
If this scenario unfolded, it would be interesting to see if state backed digital currencies simply competed with private currencies or if the nations involved would take additional steps to make sure their own currencies had a strong competitive advantage (critics would say monopoly advantage). For example, do they issue tough regulations on the issuance and use of the private currencies and use tax agencies to add on additional burdens for trying to use private currencies? It seems likely that nations would take actions to make it harder on private currencies as money just as they did on gold and silver by implementing regulations and making them subject to steep capital gains taxes in the US if bought and sold. Of course they already use legal tender laws to insure competitive advantage.
Those who are sure that the existing monetary authorities intend to wage a “war on cash” will also find this part of the IMF paper interesting. Here is a key quote on that from the paper:
“The authors acknowledge a CBDC would also result in the eventual phasing out of hard cash, but with the benefit of savings on the costs of maintaining and replacing notes and coins.”
The paper puts a positive spin on this by emphasizing that…
“Such a move to central bank electronic currency would ultimately help “significantly reduce” transaction costs for individuals and small enterprises which have little or no access to banking services.”
Making it easier for financial inclusion for those who do not have access to banking services is certainly a noble goal and we have covered the efforts of payments systems like KlickEx and M-Pesa to accomplish this.
IMF and central bank cynics and critics are not going to buy this as the primary objective though. They will view this as a pure power play by the existing monetary institutions to wipe out any competing currencies to their official currencies while also removing the ability to use cash from the system. I cannot imagine that this kind of policy making (removing all cash) would not generate substantial blow back from millions of people who already do not trust these institutions. This would simply confirm their suspicions that these kinds of policies are why they cannot trust them. They will also feel that they are waging war on their ability to do business outside the banking system if they prefer to do so. This could also raise all kinds of deeper issues as to state (and central bank) power versus individual freedom (privacy). This will certainly be an issue to monitor going forward…
This article (Cryptocurrency Followup – IMF Paper Backs Issuance of Central Bank Digital Currencies) was originally published on The View from Our White House and syndicated by The Event Chronicle.