Central bank digital currencies (CBDCs) may benefit countries looking to exert greater control over their monetary policy but don’t solve for every crisis, said a report from the International Monetary Fund (IMF) published Monday.
While most of the report assessed the different pros and cons, as well as the policy considerations, of a central bank issuing its own digital currency, its main conclusion appeared to be that a CBDC should be viewed as another tool in currency issuance or monetary policy, rather than a panacea for every world economy.
“Overall, the paper finds that CBDCs do not qualitatively change the economic forces that lead to the international use of currencies, as they are only digital forms of existing fiat currencies but quantitatively, they could reinforce the incentives behind currency substitution and currency internationalization,” the report said.
The report created a few hypothetical scenarios for the issuance of a CBDC, which envision it as a niche tool solely for cross-border payments; a tool for currency substitution; a primary unit of account/payments tool in several countries; or a widely adopted set of CBDCs which are used for both international and domestic transactions.
A CBDC is not a one-size-fits-all solution for lackluster economies, and it won’t save nations with high inflation or similar domestic issues.
“If the local currency suffers from instability and provides a poor unit of account, issuing CBDC is unlikely to change that. More broadly, the case for CBDC issuance is likely to depend on country circumstances,” the report warned.
The report comes ahead of an IMF-hosted panel on cross border payments, which will see Federal Reserve Chair Jerome Powell, Bank for International Settlements General Manager Agustín Carstens, Bank Negara Malaysia Governor Nor Shamsiah and Saudi Arabian Monetary Authority Governor Ahmed Abdulkarim Alkholifey discuss their views with moderator Kristalina Georgieva, the IMF’s managing director.
International relations
One of the chief benefits of a central bank digital currency is that it’s (perhaps obviously) a digital payments system, the report said.
Before CBDCs can be issued or adopted, countries should take a look at the international treaties governing currency agreements, the report suggested.
“Authorities will also need to assess whether restrictions on payments in CBDCs are consistent with countries’ obligations under international and bilateral treaties, including the IMF’s Articles of Agreement,” the report said.
Other considerations include the impact of a CBDC on domestic monetary policy.
In two scenarios with a CBDC, “the issuing central banks need to decide whether it is in their national interest to be the lenders of last resort to those countries that use its CBDC extensively,” the report said.
Nations can benefit from issuing their own CBDCs, such as from the fact that such tools would help issuing central banks take advantage of digital payment rails. Theoretically, CBDCs can also let central banks lower policy rates “below the effective lower bound,” letting them exert better control over their monetary policy.
However, these same facets might create drawbacks. High external demand might require central banks to expand their monetary policy toolkit, though the IMF report suggested that certain limits might reduce this concern.
Private stablecoins
The report also took a look at private efforts to launch a stablecoin that would be used internationally, warning that a truly global stablecoin poses risks of its own to monetary policy (echoing concerns raised repeatedly by finance ministers and policymakers over the last 16 months).
The authors speculated that “Big Techs” could essentially bait-and-switch their stablecoins by linking them to fiat reserves at launch, only to de-peg them later on. These unbacked global stablecoins (GSCs) would then become something akin to a stateless currency unto their own. Their value could be preserved through Big Tech’s pledge to follow “a credible set of rules and principles” acting much like a central bank themselves.
“At some stage, once adoption reaches some critical mass, the peg to existing reserve currencies may no longer be needed to generate trust in the value of the GSC, and the GSC could become a fiat currency,” the IMF said.
This risk is especially acute in countries with unstable exchange rates or high inflation, where the GSC could serve the role fiat currencies would normally, the report warned.
The adoption of a global stablecoin could even lead to a world where private companies direct the monetary policy of an asset that countries would be subject to.
“In addition, even in countries with credible policy frameworks, the adoption of GSCs could be significant as they could facilitate transactions associated with certain e-commerce or social networking platforms,” it said. “The platforms might not require the use of GSCs but could encourage it through incentives (e.g., lower prices paid for goods and services on the platform if the GSC is used).”