Some policy thoughts in light of this week’s IMF paper on CBDCs and Lagarde’s speech. In short: IMF clearly skeptical of crypto but also not aggressively pressing for CBDCs. Reading btw lines: crypto not a threat to CBs now but may be if footprint grows.
First, important to consider CBs criteria for evaluating money. There’s a demand side - making money more useful to users. And a supply side - ensuring that money helps accomplish CB policy objectives.
On demand side: IMF uses the traditional framework of MoE, UoA and SoV to gauge functionality. On these, CBDCs not clearly superior to private e-money options (WePay): worse on front-end tech, maybe better on offering privacy, security, speed of settlement.
CBDCs perhaps most promising for financial inclusion aspect of MoE. Banks clearly not rushing to service poor and rural areas, so public sector can step in. Overall, the spirit of IMF comments is to find places where the public sector can fill the gaps.
On supply side: CBs care about 1. financial integrity (criminal use of money) 2. financial stability and 3. monetary policy effectiveness. Here, on 1. CBDC could improve privacy/integrity tradeoff (CBDC anonymous until courts unveil), but on 2. CBDC could pressure bank deposits
So, overall, CBDCs not a slam dunk to IMF. They recognize private solutions have been impressive and don’t want to stifle innovation but rather supplement private sector efforts. Feels pretty light-handed. How about cryptocurrencies? Where do they fit in?
Unfortunately not a lot to say. IMF report dismisses crypto out of hand due to “erratic valuations,” ie volatility. Doesn’t pass the user demand test. They don’t even address the supply side criteria, but it’s worth examining how crypto would fare.
In short, crypto would make CBs nervous if it overcomes the demand hurdles and becomes more mainstream. In terms of 1. financial integrity: something like BTC probably would be fine, but fully private coins likely to worry CBs.
In terms of 2. financial stability, hard to say, but Lagarde seems skeptical: “crypto seeks to anchor trust in technology…still I’m not entirely convinced.” CBs don’t understand code and will worry if a bug or hack can take down networks, cause contagion, financial disruption.
In terms of 3. monetary policy effectiveness, crypto definitely problematic, since it’s money outside of the monetary system, CB polices can't directly impact it.
In short, there appears nothing friendly to CBs’ policy objectives except perhaps the publicly auditable aspect of the blockchain. Not a worry while crypto is small but a worry if big. Something to keep in mind as crypto builds out.
Taking the analysis further, seems the only crypto that would ease CB concerns are fiat-backed stablecoins. This could fulfill user demand functionality. Fiat-backed also means less risk of financial disruption. Less integrity worries due to AML/KYC. But yes, centralized.
Some important caveats: 1. IMF only discusses CBDC for domestic use. Nothing cross-border. Clearly crypto offers more here as intermediaries are layered on. 2. This is a technocratic perspective. In the end, governments can do whatever they want, like issue Petro.
Any questions, thoughts, feedback, let me know. First Tweetstorm. Please retweet if you think beneficial to crypto community. Thanks for reading.
