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IMF Report on Cryptocurrencies

Crypto assets may one day reduce demand for central bank money

The global financial crisis and the bailouts of major financial institutions renewed skepticism in some quarters about central banks’ monopoly on the issuance of currency. This fueled the creation of Bitcoin and crypto assets,  challenging the dominant role of central banks and conventional institutions.

Will cryptoassets overtake conventional fiat money?

A question twenty years old,  whether advances in information technology would render central banks obsolete now seems to draw to a conclusion. The IMF regards crypto assets as posing a stiff challenge to the dominant role of central banks regarding global monetary policies and may “one day reduce demand for central bank money.” Not only that, some are wondering if monetary policy remain effective in a world without central bank money.

For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. Also, they have gained some notoriety with cases of fraud, security breaches, and operational failures, and currently do not enjoy a good degree of trust.

Conventional money needs crypto wisdom

The report goes on to state that banks should learn from these emerging technologies.  Central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.

Central banks should strive to make fiat currencies better and more stable units of account.

However, a significant drawback that the report observed is that cryptocurrencies derive market value from their potential to be exchanged for other currencies, leading to their prices being defined highly speculatively. On the other hand, fiat currencies are valued based on the monetary policy and their status as legal tender.

Monopoly under pressure

Would diminished demand for central bank money reduce the ability of central banks to control short-term interest rates? Central banks typically conduct monetary policy by  setting short-term interest rates in the interbank market for reserves (or clearing balances  they keep with the central bank). Ceasing to be the monopoly  supplier of such reserves would indeed deprive central banks of their ability to carry out monetary policy.

Alongside the possibility of cryptocurrencies replacing fiat currency, the IMF has a myriad of questions; will this transformation raze down the demand for central bank money? Will it impact the ability of central banks to control the monetary policy and interbank interest rates? Do central banks start devising interest rates for crypto assets as well?

Christine Lagarde, Managing Director of the IMF stated earlier that the best response by central banks is “to continue running effective monetary policy while being open to fresh ideas and new demands as economies evolve.” Moreover, the government authorities around the world must tighten the hold over regulation of crypto assets.

Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy. They can remain relevant by providing more stable units of account than crypto assets and by making central bank money attractive as a medium of exchange in the digital economy.DONG HE -deputy director of the IMF’s Monetary and Capital Markets Department

The full report can be seen here

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Mercuun

IT and Blockchain enthusiast, geek and gamer since for ever.

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