IMF Cautiously Approves Central Bank Digital Currencies

IMF suggests a range of risks and benefits to central bank digital currencies

Paul de Havilland
Paul de Havilland

December 16, 2019 - 8:47 am
The IMF has recently recommended to central banks worldwide to explore the introduction of Central Bank Digital Currencies, but to proceed with caution.

CBDC Could Prove Useful to Central Banks
In its most recent weekly blog post, the IMF has suggested that CBDC have a number of benefits. These include reducing the cost of managing monetary policy and helping the unbanked get included in the financial system from which legacy banking has excluded them.

Interestingly, the organization suggested that “Some central banks are concerned by the increasing concentration of the payment system in the hands of few very large companies (some of which are foreign). In this context, some central banks view CBDC as a means to enhance the resilience of their payment system.”

The Washington-based organization has had a colorful relationship with cryptocurrencies, with one-time managing director Christine Lagarde suggesting authorities “fight fire with fire” in pursuing cryptocurrency crime. She was later to speak to the benefits of crypto assets. The International Monetary Fund has a new chief in Bulgarian economist Kristalina Georgieva.

Proceed With Caution
However, the 189 member-country organization has warned central banks to proceed with caution, outlining various risks of issuing central bank digital currencies. Among them, the most prominent are risks to the banking systems within countries. As the IMF says, “Deposits could be withdrawn from commercial banks, should people decide to hold CBDC in significant volume.”

Noting an increase in central bank interest since Facebook’s Libra announcement, the IMF now sees centrally issued cryptocurrencies as having the potential to play a positive role in economic life and monetary policy management. Its previous position on existing cryptocurrencies was far less positive, as Crypto Briefing reported.

DISCLOSURE
Authors at Crypto Briefing are invested in cryptocurrencies. The author of this post may be invested in digital assets mentioned here.

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Bank of International Settlements Requesting Feedback for Crypto Regulation
The policy would apply to over 60 central banks.

Andrey Shevchenko
Andrey Shevchenko

December 14, 2019 - 7:03 am
The Bank of International Settlements, an international body owned by 60 worldwide central banks, published a discussion paper on treatment of crypto assets. The committee is requesting the opinion of all industry participants to develop a “prudential” treatment policy.

The announcement comes after the bank’s Committee on Banking Supervision identified the growth of crypto assets as a potential risk for financial stability and existing banks.

“Crypto-assets are an immature asset class given the lack of standardisation and constant evolution,” the committee’s press release reads. Noting that certain assets have exhibited high degrees of volatility, the bank listed several types of threats deriving from potential use of crypto assets, including “liquidity, credit, market, operational (including fraud and cyber), money laundering and terrorist financing, and legal and reputation risks.”

Banks Could Enter the Cryptocurrency Space
Despite the presence of certain risks, the international body sees a possibility for banks to acquire crypto assets or provide services for them. To this end the committee urges participants to “apply a conservative prudential treatment to such exposures.”

The specifics of this treatment are however up for debate. The committee is interested in hearing the opinion of all industry stakeholders on two key issues. The first concerns the definition of a range of “features and risk characteristics” of crypto assets that would provide a basis for policy design. The second would delineate general principles and requirements for exposure to “high-risk crypto-assets,” such as the amount of capital and liquidity needed.

The conclusions of such a report would be a “minimum standard for internationally active banks,” though the committee highlights that single members can have an even more conservative treatment. Specifically, jurisdictions that completely banned the treatment of any cryptocurrency asset would be compliant with the standard.

Drafting a balanced paper that would encourage and not stifle adoption is key at this stage. The committee will accept comments by March 13, 2020 from all industry stakeholders, including academics, banks, ministries, crypto market participants and the general public.

Germany recently made a similar move by allowing its banks to provide cryptocurrency services.
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