The IMF is urging central banks to seriously consider digitizing their currencies. There are a number of stated reasons why governments would consider digitizing their money, but the real reason is less obvious.
When money is digitized, citizens have no option to cash out their currency. If it all sits on a bank’s balance sheet in digital form, governments can easily implement negative interest rates, forcing consumers to spend their money, or risk losing it. Today, depositors have a check on bank and government power over their assets because they can always withdraw their money in hard currency form.
Delphine Strauss reports in the FT:
At present, central banks issue electronic currency only to banks. When consumers swipe a card or pay bills online, they are using money provided by commercial institutions. The Bank for International Settlements warned in March that making such a fundamental change could challenge banks’ business model and allow for “digital runs” on a central bank of “unprecedented speed and scale”.
An IMF discussion paper also published on Wednesday said it was too early to tell whether central bank digital currency would carry net benefits, and that the case would vary from country to country. But Ms Lagarde is not convinced that regulation would be enough to anchor trust in new forms of money and ensure they met public policy goals.
“In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms . . . by offering a low-cost and widely available alternative,” she said, adding that a state-backed digital currency could boost competition and be a crucial back-up in future if private payment fell victim to a cyber attack, bankruptcy or a firm’s withdrawal from a local market.
Governments might also need to ensure financial inclusion, if a majority of people switched to electronic forms of money and the infrastructure for cash degraded, Ms Lagarde will argue.
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