Recently, International Monetary Fund (IMF) official Dong He published an article titled “Monetary Policy in the Digital Age” where he warned central banks to watch out for cryptocurrency competition.

Dong He, currently deputy director of the Monetary and Capital Markets Department at IMF, wrote that there had been a number of skepticisms about the monopoly central banks have over the issuance of currency. These skepticisms, he noted, led to the rise of cryptocurrencies, which now pose a threat to the governing these financial institutions have.

He went on to state that cryptocurrencies are currently too risky and volatile to pose a threat to fiat currencies, and noted cryptos been associated with operational failures, fraud cases, security breaches, and illicit activities. He further added that cryptocurrencies lack three key functions that fiat currencies must serve, which are: the capacity to function as a lender of last resort; the ability to respond flexibly to temporary shocks and smooth the business cycle, and protection against the risk of structural deflation.

He, however, noted that the wider use of cryptocurrencies may reduce volatility and further boost adoption. To address volatility, “stable” cryptocurrencies are already being created. Therefore, the IMF official concluded that central banks must develop more effective monetary policies to combat potential competition from cryptocurrencies. Dong He said:

“To fend off potential competitive pressure from crypto assets, 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.”

Dong He

The official then suggested three ways central banks could respond to the cryptocurrency threat. First, Dong wrote, central banks should strive to make fiat currencies more attractive, better and more stable units of account.

He added that government regulators should get involved in regulating the use of cryptocurrencies to stop any undue competitive advantage and regulatory arbitrage that these may get poor or a lack of regulations. Finally, He advised that central banks must strive to make fiat currencies more attractive for to be used as a settlement vehicle, potentially through the issuance of a central bank digital currency (CBDC).