15 July 2019 16:16Customed: 15 July 2019 16:30
Facebook CEO Zuckerberg during a presentation. Image © AFP
At the International Monetary Fund (IMF), they are also convinced that cryptocurrencies are the future. But to mitigate the risks of virtual currencies such as bitcoin, ethereum and Facebook’s libra, central banks continue to play an important role.
That writes IMF economists Tobias Adrian and Tommaso Mancini Griffoli in a report on the rise of digital money. The rules that central banks set will also have major consequences for the future of commercial banks, the institute that strives for financial stability. Convenience versus monopolies
In the report, the IMF points out both the positive and negative sides of cryptocurrency. Positive are the convenience, speed and efficiency of digital money, which also ensures much lower transaction costs for transfers. These kinds of things will promote the general public’s embrace of cryptocurrencies, the authors expect.
But there are also serious risks involved. For example, the institute fears monopolies, criminal activities, the threat that cryptocurrency poses to weaker currencies in some countries, the lack of consumer protection and financial instability. These risks can be mitigated when central banks intervene.
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In addition, cooperation between central banks and departures of digital money is an option. For example, fintech companies could even store reserves with central banks, provided they meet strict criteria and supervision.
In several countries, including India, Hong Kong and Switzerland, this has already been started cautiously. In China, people are even going a step further and large crypto providers such as Alipay and WeChat Pay already hold reserves at their national central bank.
Another possibility is that central banks in some countries offer a cryptocurrency together with private parties, which amounts to a digital version of cash. This would involve companies taking care of the platform, technology and transactions and central banks the regulation and reserves.
According to the IMF, the current banking model will not just disappear in the future, but the role of retail banks could change completely. “Banks will feel the pressure of digital money, but need to be able to respond by offering more attractive or similar services. Still, policymakers need to be prepared for disruption in the banking sector,” the authors write. Three scenarios for the future
The institute has three future scenarios ready for the banking sector. In the first and ‘most obvious’ scenario, cryptocurrency and bank money coexist. In addition, banks – which are still in a strong position – could compete with cryptocurrencies, but the question is whether they will adapt in time.
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The second scenario appeals more to the imagination. In it, both forms of money complement each other, something that can already be seen in some low-wage countries and emerging economies such as China. This can lead to credit to poorer households, which are currently excluded. Furthermore, cooperation can lead to the sharing of data on creditworthiness.
The latter scenario is the most radical. In it, the IMF economists paint a picture in which commercial banks lose control of deposits: the money we deposit to use them at a later date. When more payments are made with digital money, this system could turn the banking world upside down and even decouple the deposit and credit function of a bank.
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