The International Monetary Fund (IMF) has published a paper that launches a new series of work seeking to “provide insight into the intersection of technology and the global economy.”
The paper, titled, 'The Rise of Digital Money,' was authored by Tobias Adrian and Tommaso Mancini Griffoli, and seeks to examine the challenges that electronic forms of money pose to legacy financial institutions and regulators.
IMF Argues Stablecoins Are Less Risky Than Cryptocurrencies
The authors anticipate that cash and bank deposits - “the two most common forms of money” - will “face tough competition and could even be surpassed” by emerging electronic monetary commodities, such as stablecoins.
The paper asserts that stablecoins are more likely to challenge existing payment systems than traditional cryptocurrencies, arguing that speculative cryptocurrencies are “by far” riskier - with Bitcoin (BTC) producing averages daily price fluctuations approximately 10 times higher “than in most G7 currency pairs, and even a little higher than in the Venezuelan Bolivar to U.S. dollar exchange rate.”
Issuer Credibility and Underlying Asset Volatility Among Issues Brought By Stablecoins
While the paper emphasizes the advantages stablecoins offer over traditional monetary forms, such as fast and frictionless payments, and reduced price volatility when compared to speculative crypto assets, the IMF expresses concerns pertaining to fundamentals underpinning stablecoins.
The authors warn that stablecoins: “use some variation of a simple system to stabilize value, which is not always credible,” adding that while other cryptocurrencies are “akin to a floating exchange rate,” managed stablecoins “resemble managed exchange rates.”
“However, we know too well the common fate of pegs. When a country’s economic fundamentals are off-kilter, the central bank can run out of the foreign exchange reserves needed to purchase domestic currency in the marketplace. Providers of managed coins can also run out of assets to support the price of their coins, especially because they may stand on shaky fundamentals—use determining value, and value encouraging use.”
IMF Advocates Active Regulatory Role for Central Banks
The paper emphasizes “important role” central banks will play in guiding the trajectory and forms of digital monetary commodities through regulatory measures.
The authors suggest that “One solution is to offer selected new e-money providers access to central bank reserves, though under strict conditions,” adding: “Doing so raises risks, but it also has various advantages. Not least, central banks in some countries could partner with e-money providers to effectively provide ‘central bank digital currency (CBDC)’, a digital version of cash.”
However, the paper advocates an alternative public-private model, called the “synthetic CBDC (sCDBC).” The sCBDC system would see central banks offer settlement services to virtual money providers, including access to central bank reserves, however, “all other functions would be the responsibility of private e-money providers under regulation.”