What is the future of money? It's digital and backed by central banks, IMF says

Central bank digital currencies offer more resilience, more safety, greater availability and lower costs than private forms

A commuter passes a digital display of cryptocurrency Bitcoin in the central district of Hong Kong. Bloomberg

Central banks around the world are gearing up to harness new technologies, with central bank digital currencies (CBDCs) gaining momentum, but there's no “one-size-fits-all” solution for all economies, the International Monetary Fund said.

Well-designed CBDCs are more stable when compared to unbacked crypto assets that are “inherently volatile”, Kristalina Georgieva, managing director of the IMF, said in a speech at an Atlantic Council event on Wednesday.

Even the better managed and regulated stable coins may not be a match for a stable and well-designed CBDC, the IMF chief said.

“These are still early days for CBDCs and we don’t quite know how far and how fast they will go. What we know is that central banks are building capacity to harness new technologies — to be ready for what may lie ahead,” she said.

“If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability and lower costs than private forms of digital money.”

So far, about 100 countries are exploring CBDCs on some level, with some researching, some testing and a few already distributing CBDCs to the public, she said.

For example, in the Bahamas, the Sand Dollar — the local CBDC — has been in circulation for more than a year.

Sweden’s Riksbank has developed a proof of concept and is exploring the technology and policy implications of CBDC.

In China, the digital renminbi, which is called e-CNY, continues to progress with more than 100 million individual users and billions of yuan in transactions.

In January, the Federal Reserve issued a report saying that “a CBDC could fundamentally change the structure of the US financial system”.

The Washington-based IMF is deeply involved in the issuing of CBDCs, including through providing technical assistance to its country members.

The multilateral lender on Wednesday published a paper highlighting the experiences of six central banks — including those in China and Sweden — that are pioneering experimenting with CBDCs.

The paper outlined three main lessons from the experiences of these central banks.

The first one is that there is no “one-size-fits-all” solution for the banking regulators of various countries.

“There is no universal case for CBDCs because each economy is different. In some cases, a CBDC may be an important path to financial inclusion — for instance, where geography is an obstacle to physical banking,” Ms Georgieva said.

In other instances, a CBDC could provide an essential back-up in case other payment instruments fail, such as, for example, when the Eastern Caribbean Central Bank extended its CBDC pilot to areas struck by a volcanic eruption last year.

“So, central banks should tailor plans to their specific circumstances and needs,” she said.

The second lesson is that financial stability and privacy considerations are crucial for the design of CBDCs.

“Central banks are committed to minimising the impact of CBDCs on financial intermediation and credit provision,” Ms Georgieva said.

The countries studied in the IMF paper offer CBDCs that are not interest-bearing — which makes a CBDC useful, but not as attractive an instrument for savings as traditional bank deposits, she added.

The three currently active CBDC projects — in the Bahamas, China and the Eastern Caribbean Currency Union — have placed limits on holdings of CBDCs to prevent sudden outflows of bank deposits into CBDCs, the paper said.

“Limits on holdings of CBDCs also helps meet people’s desire for privacy while guarding against illicit financial flows,” Ms Georgieva said. “Smaller holdings are allowed without the need for full identification if the risks of money laundering and terrorist financing are low — this could be a boon for financial inclusion.”

However, larger transactions and holdings require more stringent checks.

“In many countries, privacy concerns are a potential deal breaker when it comes to CBDC legislation and adoption. So, it’s vital that policymakers get the mix right,” she said.

The third lesson is that introducing a CBDC is about finding the “delicate balance between developments on the design front and on the policy front”, the IMF said.

This requires time, resources and close partnerships with private firms to successfully distribute CBDCs, build e-wallets, add features and push the bounds of technology.

On the policy front, countries will need to consider developing new legal frameworks, new regulations and new case law.

“Together, careful design and policy considerations will underpin trust in CBDCs. But let us not forget that trust must be anchored in credible central banks with a history of delivering on their mandates,” the IMF boss said.

Policymakers will need to resolve many open questions, technical obstacles and policy trade-offs as countries experiment with new digital forms of money, she said.

“At the IMF, we, too, are rolling up our sleeves and we will play our role,” she said. “We are already supporting our members in their CBDC experiments — to understand big-picture trade-offs, to provide technical assistance, and to serve as a transmission line of learning and best practice across all 190 members.”