IMF’s new report highlights the decline in fiat use and crypto competition. The report urges the banks to combat the competition by making fiat attractive and stable, creating own digital currency and crypto regulations.
IMF encourages central banks to combat crypto competition
In a new report titled “Monetary Policy in the Digital Age” by the Deputy Director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), Dong He talks about the decline in Fiat and watching out for the crypto competition.
He believes that digital currencies might one day reduce the demand for the central bank money stating:
“As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and service-based digital economy.”
Unlike central banks or others that have created a credit-based relationship with the customers, cryptocurrencies are becoming commodity money.
He further moves on to write about the skepticism over central banks’ monopoly over currency issuance. According to him, this has led to cryptos’ rise
“which challenged the paradigm of state-supported currencies and the dominant role of central banks and conventional institutions in the financial system.”
Solutions: Attractive fiats, crypto regulations & central bank digital currency
However, he notes that cryptos are too risky and volatile to pose any threat to the fiat currencies. Furthermore, they are ridden with security breaches, fraud cases, illicit activities and operational failures.
As for the solution to combat competition from cryptocurrencies, he suggests that central banks develop more effective monetary policies and crypto regulation should also be at the top of the governments’ agenda.
“They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.”
He points out that banks should strive to make fiats more attractive and stable “while being open to fresh ideas and new demands”.
“Central banks should continue to make their money attractive for use as a settlement vehicle. For example, they could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are.”
He also pointed out that volatility is the only factor that prevents from their wider adoption. Apparently, cryptos also lack the key functions of fiat currencies, though he mentions that with wider use volatility would reduce and adoption would boost.
Cryptocurrencies are surely affecting the central banks, the effect might be slow but it is there which is pushing central banks and governments around the world to come up with their own digital currency.
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