Central banks should look seriously at issuing digital currency in order to “fill the void left by the decline of cash”, according to the head of the IMF. Christine Lagarde said in Singapore on Wednesday that there could be a role for the state to supply money to the digital economy to aid financial inclusion and avoid a situation where “too much power could fall into the hands of a small number of outsized private payment providers”.
Any efforts would have to balance the privacy of the currency’s users against the need for crime prevention. Central banks are split on how they should respond to the rise of electronic payments, which calls into question their status as the monopoly issuers of official currency. Some — including Sweden’s Riksbank, the Bank of Canada and the People’s Bank of China — are already considering issuing digital currency to the public.
“If banknotes and coins have had their day, then in the near future, the general public will no longer have access to a state-guaranteed means of payment,” Stefan Ingves, the Riksbank governor, wrote in June, asking: “In a cashless society, what would legal tender mean?” While the case for digital currency is not universal, we should investigate it further, seriously, carefully and creatively IMF head Christine Lagarde However, others fear that giving consumers direct access to digital central bank money could endanger financial stability.
At present, central banks issue electronic currency only to banks. When consumers swipe a card or pay bills online, they are using money provided by commercial institutions. The Bank for International Settlements warned in March that making such a fundamental change could challenge banks’ business model and allow for “digital runs” on a central bank of “unprecedented speed and scale”.
An IMF discussion paper also published on Wednesday said it was too early to tell whether central bank digital currency would carry net benefits, and that the case would vary from country to country. But Ms Lagarde is not convinced that regulation would be enough to anchor trust in new forms of money and ensure they met public policy goals. “In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms . . . by offering a low-cost and widely available alternative,” she said, adding that a state-backed digital currency could boost competition and be a crucial back-up in future if private payment fell victim to a cyber attack, bankruptcy or a firm’s withdrawal from a local market.
Governments might also need to ensure financial inclusion, if a majority of people switched to electronic forms of money and the infrastructure for cash degraded, Ms Lagarde will argue. Some of these goals might be achieved through public partnership with the private sector, but there was also a case for a digital currency that would be a liability of the state and not of a private firm, she will say.
Central banks might also wish to design digital currency in a way that would allow users to remain anonymous for legitimate reasons — such as avoiding hacking and customer profiling — while giving law-enforcement agencies the ability to investigate money-laundering and terrorist financing.
Ms Lagarde acknowledged the worries over financial stability, and concerns that central banks could stifle private-sector innovation if they offered the same services — but will say that “while the case for digital currency is not universal, we should investigate it further, seriously, carefully and creatively”.