The relationship of central banks with cryptocurrencies varies from country to country. However, many have considered the idea of having their own digital currencies, known as “Central Bank Digital Currency” or CBDC. But recently the IMF explained in a report that CBDCs do not solve all problems despite their potential.
Certainly, central bank digital currencies (CBDCs) can benefit countries looking to exert greater control over their monetary policy. Despite this, the International Monetary Fund (IMF) made it clear that these do not solve all problems in a recently published report.
What does the IMF report say about CBDCs?
Most of the report evaluated the different pros and cons of CBDCs. However, his main conclusion seemed to be that a CBDC should be seen as another monetary policy tool, and not as the solution for all world economies.
Overall, the paper finds that CBDCs do not qualitatively change the economic forces that drive the international use of currencies. These are just digital forms of the existing fiat currencies. However, they recognize that quantitatively these could reinforce the incentives behind the substitution and internationalization of currencies.
Another conclusion made in the IMF report is that a CBDC is not a one-size-fits-all solution for all mediocre economies. Nor will it save countries with high inflation or similar domestic problems.
“If the local currency suffers from instability and provides a poor unit of account, the CBDC issuance is unlikely to change that. More generally, the case for CBDC issuance is likely to depend on country circumstances”The report warned.
Interestingly, the report created some hypothetical scenarios for issuing a CBDC. For example, some scenarios view it as a niche tool only for cross-border payments; others as a tool for currency substitution; among others.
A scenario with a widely adopted CBDC suite used for both international and domestic transactions was even considered.
What benefits did they find?
One of the main benefits of CBDCs is that they form (perhaps obviously) a digital payment system. However, before CBDCs can be issued or adopted, countries should take a look at the international treaties that govern monetary agreements.
“Authorities will also need to assess whether payment restrictions in CBDCs are consistent with countries’ obligations. This under international and bilateral treaties, including the Articles of Agreement of the IMF”Says the report.
In a world where CBDCs are massively adopted, issuing central banks must decide whether it is in their national interests to be the lenders of last resort for those countries that use their CBDC extensively.
However, these same facets can be inconvenient. High external demand may require central banks to broaden their monetary policy toolkit, although the IMF report suggested that certain limits could reduce this concern.
The report also looked at private efforts to launch a stablecoin that would be used internationally, warning that a truly global stablecoin presents its own risks to monetary policy.
An unsupported global stablecoin (GSC) would become something of a stateless currency. Its value could be preserved through the commitment of great technologies to follow «a credible set of rules and principles»Act as a central bank.
In countries with unstable exchange rates or high inflation, a global stablecoin could fulfill the role that fiat currencies would normally play, the report warned. But, in turn, the adoption of a global stablecoin could lead to a world in which private companies direct the monetary policy of an asset to which countries would be subject.
However, this is a debate that is just beginning, and for now the IMF report is focused on the development and possibilities of central bank digital currencies (CBDC). The future holds many alternatives and possibilities for us, but it is up to us to accept the consequences of it, whatever they may be.