IMF weighs in on central bank digital currencies News
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IMF weighs in on central bank digital currencies

The International Monetary Fund (IMF) published a FinTech Note on central bank digital currencies (CBDCs) this Wednesday. Analogous to a digital form of paper money, a CBDC is a digital liability of a central bank that is available to the general public.

The IMF paper details the experiences of the six central banks at the frontier of CBDCs: Central Bank of The Bahamas, People’s Bank of China, Eastern Caribbean Central Bank, Banco Central del Uruguay, Sveriges Riksbank and Bank of Canada. Despite the importance of individual country context, the IMF noted several commonalities shared by the countries currently experimenting with CBDCs.

The commonalities focused on the difficulties of transitioning from centralized currency to distributed technology as central banks must balance the traditional monetary and financial system with the advances of the digital era. One such difficulty is managing policy trade-offs. For example, the anonymity of a CBDC is not only correlated with policy goals like financial inclusion but also with policy concerns like money laundering.

The costs associated with the development process of implementing CBDCs presents another policy concern. The difficulty of implementing CBDCs is in establishing the legal framework that clarifies whether the central bank has the mandate to issue a CBDC and what status the CBDC itself would have legally. In some cases, legal reform might be necessary. Issues like the rights of holders subsequent to the insolvency of authorized providers must be decided.

Commonalities shared by the countries currently experimenting with CBDCs also focused on policy goals. Goals included increasing financial inclusion, facilitating easy access to payments, making payments more efficient, ensuring the resilience of payments, reducing illicit use of money, protecting monetary sovereignty and increasing competition.

On the day of publication on Wednesday, IMF Managing Director Kristalina Georgieva addressed the rise of CBDCs at a DC-based think-tank Atlantic Council: “We have moved beyond conceptual discussions of CBDCs and we are now in the phase of experimentation…Central banks are rolling up their sleeves and familiarizing themselves with the bits and bytes of digital money.”

Georgieva also referenced the Federal Reserve’s January report, which announced that the central bank “is considering how a CBDC might fit into the U.S. money and payments landscape.” The report further read: “While no decisions have been made on whether to pursue a CBDC…analysis to date suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.”