IMF: the only good cryptocurrency is a fiat-backed stablecoin
Thesis: so, they didn’t quite say that, but implicitly, the IMF CBDC report suggested crypto is no friend of central banks.
(copied from Twitter, with edits)
Some policy thoughts in light of this week’s IMF paper on Central Bank Digital Currencies (CBDCs) and Lagarde’s speech. In short: the IMF is clearly skeptical of crypto but also not aggressively pressing for CBDCs. Reading between the lines: crypto is not a threat to CBs now but may be if its footprint grows.
First, it’s important to consider CBs criteria for evaluating money. There’s a demand side — making money more useful to users. And a supply side — ensuring that money helps accomplish CB policy objectives.
On the demand side: the IMF uses the traditional framework of medium-of-exchange, unit-of-account and store-of-value to gauge functionality. On these, CBDCs not clearly superior to private e-money options (e.g. WePay): worse on front-end tech, maybe better on offering privacy, security, speed of settlement.
CBDCs perhaps most promising for the financial inclusion aspect of medium-of-exchange. Banks clearly not rushing to service poor and rural areas, so the public sector can step in. Overall, the spirit of IMF comments is to find places where the public sector can fill the gaps.
On the supply side: CBs care about 1. financial integrity (potential criminal use of money) 2. financial stability and 3. monetary policy effectiveness. Here, on 1. CBDC could improve the privacy/integrity tradeoff (CBDC anonymous until unveiled by the courts), but on 2. CBDC could pressure bank deposits if trust migrates from commercial to central banks.
So, overall, CBDCs not a slam dunk to the IMF. They recognize private solutions have been impressive and don’t want to stifle innovation but rather supplement private sector efforts. Feels pretty light-handed. How about cryptocurrencies? Where do they fit in?
Unfortunately not a lot to say. IMF report dismisses crypto out of hand due to “erratic valuations,” ie volatility. Doesn’t pass the user demand test. They don’t even address the supply side criteria, but it’s worth examining how crypto would fare.
In short, crypto would make CBs nervous if it overcomes the demand hurdles and becomes more mainstream. Perhaps not so much on criteria 1. financial integrity: something like BTC probably would be fine, though fully private coins likely to worry CBs.
But in terms of 2. financial stability: hard to say, but Lagarde seems skeptical: “crypto seeks to anchor trust in technology…still I’m not entirely convinced.” CBs don’t specialize in code and will likely worry if an attack can take down networks, cause contagion across crypto and ultimately cause some kind of financial disruption and major losses to users.
In terms of 3. monetary policy effectiveness: crypto definitely problematic, since it’s money outside of the monetary system, so CB polices can’t directly impact it.
In short, there appears nothing friendly to CBs’ policy objectives except perhaps the publicly auditable aspect of the blockchain. Not a worry while crypto is small but a worry if big. Something to keep in mind as crypto builds out.
Taking the analysis further, it seems the only crypto that would ease CB concerns are fiat-backed stablecoins. This could fulfill user demand functionality. Fiat-backed also means less risk of financial disruption and losses. Less integrity worries due to AML/KYC. But yes, centralized.
Some important caveats: 1. IMF only discusses CBDC for domestic use. Nothing cross-border. Clearly crypto offers more here as intermediaries are layered on. 2. This is a technocratic perspective. In the end, governments can do whatever they want, like issue Petro.
