IMF Says Central Bank Currency Will Face Pressures in the Digital Age

The International Monetary Fund (IMF) estimates that central bank currencies will confront major obstacles in a rapidly digitizing financial system.

In a new blog post, the IMF says that as digital currencies increasingly crop up and the financial sector rapidly evolves, the public and private economic sectors will clash and put pressure on central banks to innovate and keep up with tech powerhouses.

“Today’s, or even tomorrow’s, money is unlikely to meet the needs of the day after… Keeping with the pace of change of technology, user needs, and private-sector competition will be challenging for central banks…

Central banks would thus have to become more like Apple or Microsoft in order to keep central bank digital currencies on the frontier of technology and in the wallets of users as the predominant and preferred form of digital money…

Much depends on each central bank’s ability and willingness to consistently and significantly innovate. Keeping pace with technological change, rapidly evolving user needs, and private sector innovation is no easy feat.”

The IMF believes that the best way for central banks to compete with the fast-paced digital currency revolution is to build a system where the private sector can convert its assets into a central bank currency.

“The answer lies in a fundamental symbiotic relationship: the option to redeem private money into perfectly safe and liquid public money, be it notes and coins, or central bank reserves held by selected banks…

In short, the option of redemption into central bank currency is essential for stability, interoperability, innovation, and diversity of privately-issued money, be it a bank account or other. A system with just private money would be far too risky. And one with just central bank currency could miss out on important innovations. Each form of money builds on the other to deliver today’s dual money system – a balance that has served us well.”

As in today’s society, the IMF asserts that a dual monetary system between the public and private sector can continue to function even as central banks issue digital currencies.

“If and when countries move ahead with central bank digital currencies, they should consider how to leverage the private sector. Today’s dual-monetary system can be extended to the digital age. Central bank currency – along with regulation, supervision, and oversight – will continue to be essential to anchor stability and efficiency of the payment system.

And privately-issued money can supplement this foundation with innovation and diversity – perhaps even more so than today. Where central banks decide to end up on the continuum between private-sector and public-sector involvement in the provision of money will vary by country, and ultimately depend on preferences, technology, and the efficiency of regulation.”

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