International Monetary Fund head Christine Lagarde has said that central banks around the world should consider issuing digital currency.
Speaking in Singapore, she said such a move could satisfy public policy goals like financial inclusion, security and consumer protection, as well as enabling privacy in payments for safer digital currency transactions.
As opposed to focusing on the downsides of financial integrity and stability, Lagarde urged policy makers to show more creativity when managing the retreat from cash in developed economies.
The case for central bank backed digital (CBDC) currencies
Despite the fact regulators have voiced concerns over digital currencies and called for greater oversight, Lagarde recognised the increasing popularity of non-cash payments.
“I believe we should consider the possibility to issue digital currency,” she revealed at the Singapore Fintech Festival. “There may be a role for the state to supply money to the digital economy.
“The advantage is clear. Your payment would be immediate, safe, cheap and potentially semi-anonymous… And central banks would retain a sure footing in payments.”
In order to ensure anonymity, Lagarde suggested that central banks could design a digital currency that authenticated user identities but didn’t disclose this information to third parties.
“If a suspicion arose it would be possible to lift the veil of anonymity and investigate,” she said. “This setup would be good for users, bad for criminals, and better for the state, relative to cash. Of course, challenges remain. My goal, at this point, is to encourage exploration.”
Taking inspiration and mitigating risk
Lagarde has clearly been monitoring CBDCs closely, revealing that countries including Canada, China, Sweden and Uruguay are “seriously” considering the issuance of digital currency.
“They are embracing change and new thinking – as indeed is the IMF,” she added.
Lagarde noted that major cryptocurrencies like bitcoin, ethereum and XRP, are also “vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.”
She added that while the case for digital currency “is not universal,” it should be investigated “seriously, carefully and creatively”.
In order to mitigate risk, Lagarde argued for a collaborative approach – “The central bank focuses on its comparative advantage — back-end settlement — and financial institutions and start-ups are free to focus on what they do best — client interface and innovation. This is public-private partnership at its best.”
The IMF view on public cryptocurrencies remains unchanged
In a new report revealed alongside Lagarde’s speech, the IMF reiterated its view that public cryptocurrencies are not a viable alternative to CBDCs.
“Cryptocurrencies are different along many dimensions and struggle to fully satisfy the functions of money, in part because of erratic valuations,” said the Casting Light on Central Bank Digital Currency report.
When compared to other forms of money such as cash, private e-money and commercial bank deposits, the IMF concluded that “cryptocurrencies are the least attractive option.”
Although the IMF acknowledged that cryptocurrencies offer the advantage of anonymity and tech issues could be overcome, they received a low score in settlement speed.