Central Banks Should Consider Digital Currency Issuance, Says Lagarde, IMF Boss

Managing Director of the International Monetary Fund (IMF), Christine Lagarde, on Wednesday said the world’s central bank cannot run forever away from issuing digital currency, in an age where change remains constant.

In a presentation titled: “Winds of Change: The Case for New Digital Currency,” at the Singapore Fintech Festival, she expressed belief that central banks across the world “should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

Such currency, she explained, “could satisfy public policy goals, such as: financial inclusion, and security and consumer protection; and to provide what the private sector cannot- privacy in payments.”
On financial inclusion, Lagarde said digital currency offers great promise by being able to reach people and businesses in remote and marginalized regions at a time when banks are in no rush to serve poor and rural populations.

This is critical, she continued, “because cash might no longer be an option here. If the majority of people adopt digital forms of money, the infrastructure for cash would degrade, leaving those in the periphery behind.

“What about subsidizing cash usage in those areas? But that means that economic life in the periphery would become disconnected from the center.”
While agreeing that offering a digital currency is not necessarily the only answer, the MD noted the scope for “governments to encourage private sector solutions, by providing funding, or improving infrastructure.”

Digital currency, she continued, relates to security and consumer protection, describing it as “a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms—banks, clearinghouses, and network operators. Simply by offering a low cost and widely available alternative.

“Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service.
“For a start, private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure. Resilience may also suffer—with only a few links in the payment chain, the system may stop working if one of these links breaks. Think about a cyber-attack, a glitch, bankruptcy, or a firm’s withdrawal from the local market,” she stressed, adding that while regulation may not be able to fully redress these downsides, a digital currency could offer advantages, as a backup means of payment.

“And it could (however) boost competition by offering a low-cost and efficient alternative—as did its grandfather, the old reliable paper note,” Lagarde added.
Another benefit of digital currency, she continued, is in the privacy domain, given that cash allows for anonymous payments and protection of privacy, while avoiding exposure to hacking and customer profiling.
As a simple example, she said: “Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow? Would a privately-owned payment system push you to the broccoli aisle?”

The IMF boss however warned that digital currency has its potential downsides, including risks to financial integrity and financial stability, in addition to those stifling innovation.
Rather than run away from these risks, she believes central banks should face them creatively and instead moderate them by designing digital currency in new and innovative ways using technology as “a very wide canvas.”

On the risks to financial integrity and the tradeoff between privacy and financial integrity, she said central banks could “design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.”

This, she said does not prevent anti-money laundering and terrorist financing controls from running in the background and that where there is a suspicion, it is possible to lift the veil of anonymity and investigate.
“This setup would be good for users, bad for criminals, and better for the state, relative to cash. Of course, challenges remain. My goal, at this point, is to encourage exploration,” she added.

Digital currencies, for her, could intensify pressure on bank deposits, thereby posing a risk to financial stability, as digital currencies being “sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all?”

She recommended innovation such that when digital currency becomes too popular and might ironically stifle innovation, the central bank could partner the private sector—banks and other financial institutions. Under such arrangement, she believes, the central bank could say, for example: “you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.

“This partnership could take various forms. Banks and other financial firms, including startups, could manage the digital currency. Much like banks which currently distribute cash.
“Or, individuals could hold regular deposits with financial firms, but transactions would ultimately get settled in digital currency between firms. Similar to what happens today, but in a split second. All nearly for free. And anytime.”

In summary, she urged “the central bank focuses on its comparative advantage—back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. This is public-private partnership at its best.

https://investdata.com.ng/2018/11/central-banks-should-consider-digital-currency-issuance-says-lagarde-imf-boss/