The International Monetary Fund (IMF) has recently pushed out a staff discussion note called “Fintech and Financial Services: Initial Considerations” which provides a wealth of detail in how the organisation takes view on the current rise of cryptocurrencies.
The IMF paper focusses largely on the role DLT can play in cross-border payments and ends on the role that the organisation feels they can play on a global scale to coordinate and regulate digital assets, largely, it appears, by supporting the role of central banks in their quest for creating their own CBDCs and assisting in designing the future regulatory environment.
In other words, push current private cryptocurrencies into a subservient role and let central banks take control:
“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy. A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system. This threat is not imminent given the current transactions domain and limitations of existing private virtual currencies and their likely medium-term growth. Stability and safety considerations connected to this proliferation may, however, be relevant in the medium run but could presumably be dealt with by other measures.”
The key findings include the following:
(1) Boundaries are blurring among intermediaries, markets, and new service providers.
(2) Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition.
(3) Trust remains essential, even as there is less reliance on traditional financial intermediaries, and more on networks and new types of service providers.
(4) Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.
The international organisation also calls for jurisdictions to revise rules governing ownership and contractual rights and obligations when it comes to digital assets.
“DLT records the transfer of ownership of “digital tokens,” which are essentially units in a ledger. They can either have intrinsic value themselves (an “intrinsic token” like Bitcoin), or be digital representations of a physical or digital asset that exists outside the ledger (an “asset-based token” representing an interest in another asset such as securities). The legal status of a digital token, and the legal effect of its transfer are not clear. For example, would the transfer of an asset-backed token (e.g., representing a security) on a ledger transfer legal ownership of the security or would registration outside the ledger (e.g., in a corporate share registry) still be required? Jurisdictions are trying to develop answers to these questions but country practice varies. The resolution of these questions is crucial for the economy to function and will require more thought by policymakers.”
The IMF paper notes that:
” …in their current form, virtual currencies are not likely to be adequate stores of value given the volatility in their exchange rates to fiat money. This same volatility would undermine hub-and-spoke networks, as two “foreign exchange rate” conversions are needed: when the token is acquired, and when it is sold. Even if the virtual currency is held for very short periods, the transaction involves foreign exchange rate risk. FX risk could potentially be hedged, although costs could then rival those of correspondent bank transfers.”
The paper adds a Central Bank Digital Currency (CBDC) might resolve the coordination problem over new virtual currencies, and could lead to even more technological innovation. But adds that it might allow the central bank to retain control of monetary policy effectiveness, in case privately-issued virtual currencies started to gain significant ground.
A DLT-based CBDC could also be more secure and resilient than current settlement systems which are exposed to single point of failure risk. Finally, by facilitating small value payments, it could boost the adoption and efficiency of the new, decentralized, service economy. However, CBDCs raise multiple potential costs and risks, such as managing the platform and its integrity, resolving scalability, and dealing with issues of privacy.