Central bank digital currencies can co-exist with privately issued cryptocurrencies as the dual monetary system evolves, according to the International Monetary Fund.
Today's dual monetary system involves privately issued money – by banks, telecom companies or specialist payment providers – built on a foundation of publicly issued money by central banks, the IMF said in a blog post.
“This system offers advantages, including innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector,” Tobias Adrian, the IMF's financial counsellor and director of its monetary and capital markets department, and deputy division chief Tommaso Mancini-Griffoli, said in the co-authored post.
The world's largest central banks – and even some of the smaller ones – are toying with the idea of issuing digital currencies, or the electronic equivalent of cash.
Unlike privately issued cryptocurrencies such as Bitcoin and Ethereum, central bank digital currencies do not work on the concept of mining.
The People’s Bank of China aims to become the world's first central bank to issue a digital currency as part of its push to internationalise the yuan and reduce its dependence on the global dollar payment system. In Sweden, already the world’s least cash dependent economy, the Riksbank has also begun testing the e-krona.
The European Central Bank and Bank of England have both launched consultations on digital currencies, while the Bank of Japan and the US Federal Reserve have so far taken a back seat.
Meanwhile, central banks should not face a choice between either offering their own digital currencies or encouraging the private sector to provide a digital variant. The two can complement each other, the IMF blog’s co-authors said.
The option of redemption into a central bank currency, be it notes, coins or central bank reserves held by selected banks, is essential for stability, interoperability, innovation and diversity of privately issued money, according to the Washington-based lender.
“A system with just private money would be far too risky. And one with just central bank currency could miss out on important innovations,” the co-authors said.
Private money that can be redeemed at a fixed-face value into central bank currency becomes a stable store of value and an efficient means of payment, they added.
If central bank digital currencies have to overshadow privately issued money, the regulators must be willing to “consistently and significantly innovate”, keep pace with technological change, rapidly evolving user needs and private sector innovation, the IMF said.
“Central banks would have to become more like Apple or Microsoft in order to keep central bank digital currencies on the frontier of technology and in the wallets of users as the predominant and preferred form of digital money,” according to the authors.
With money transfers possible in entirely new ways, central banks must undertake frequent architectural redesigns to stay relevant. Pressures will also come from the supply side as the private sector will continue innovating, the fund said.
“A central bank digital currency may be designed to encourage the private sector to innovate on top of it,” the co-authors said.
“Some central banks may even allow other forms of digital money to co-exist while leveraging the settlement functionality and stability of central bank digital currencies. This would open the door to faster innovation and product choice.”
Digital money can co-exist with central bank digital currency and it would require a licensing arrangement and set of regulations to fulfil public policy objectives, including operational resilience, consumer protection, market conduct and data privacy, among others.
When countries decide to move ahead with central bank digital currencies, they should leverage the private sector, the fund suggested.
“Central bank currency – along with regulation, supervision, and oversight – will continue to be essential to anchor stability and efficiency of the payment system. And privately issued money can supplement this foundation with innovation and diversity,” the authors added.
