1/ On a long late night train ride back to NYC and killing some time to read IMF Managing Director Christine Lagarde’s latest speech on the “fintech revolution” and the new IMF paper on Central Bank Digital currencies. Real-time thoughts as I read...
3/ I am starting with Lagarde’s speech first, which is focused on the changing nature of money. In short, money itself is changing. In the increasingly digitalized world, we expect money to become more convenient, user-friendly, safe, readily available for online & P2P use.
4/ The fintech revolution questions these two forms of money: coins and commercial bank deposits. And it also questions the role of the state in providing money.
5/ Quote in Lagarde's speech where she addresses crypto: “Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement."
6/ As we evolve into a digital economy, should central banks issue a new digital form of money? Lagarde believes that the IMF should consider the possibility to issue digital currency as there may be a role for the state to supply money to the digital economy.
7/ Pros of a central bank digital currency: 1) financial inclusion (ability to reach people in marginalized regions); 2) security and consumer protection; 3) privacy in payments (Lagarde did not seem to like this at all, using the ‘what if criminal use this’ example..lol ok?)
8/ Cons of a central bank digital currency: 1) risks to financial integrity (versus privacy); 2) risks to financial stability (translation: what’s the point of banks anymore? Ok this sounds like an existential crisis here) 3) Risks to innovation.
8a/ I am confused as to Lagarde’s point on innovation actually. She asks “Where is your role if the central bank offers a full-service solution, from digital wallet, to token, to back-end settlement services?”, which is a question I found confusing.
8b/ As a user of a non-state backed currency (I.e. bitcoin), why would I care if the central bank wanted to offer a full-service solution for fiat currency in digital form??
**thinks to the proliferation of stablecoins** oh, right. okay.
**thinks to the proliferation of stablecoins** oh, right. okay.
8c/ Lagarde proposes public-private partnerships, where the central bank focuses on its comparative advantage—back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. Interesting......
9/ Moving onto the IMF paper now, which is titled "Casting Light on Central Bank Digital Currencies”. Kicks off with: how should central banks adapt to the digitization of economic activity? Their answer? A Central Bank Digital Currency (CBDC).
10/ Major caveat: the IMF paper abstracts from cross-border considerations by assuming that CBDC is for domestic use only. So, it’s country-specific and would largely depend on how each central banks will approach the design. So not what we think of as "crypto" in this industry.
11/ CBDC is a new form of money, issued digitally by the central bank and intended to serve as legal tender. As a result, the IMF agrees that this means that change in legislation would be required.
12/ What would a CBDC look like? Here's a comparison of either an account or token based CBDC. Decentralized settlement currently falls short in scalability, energy efficiency, and payment finality— centralized settlement technology would likely more efficient. 
13/ Also, settling a transaction using token based CBDC would require external verification of the tokens. As a result, transactions might not be entirely anonymous. The extent of anonymity would depend on whether wallets are registered and transaction information is recorded.
14/ In economics, money is seen as having three functions: a unit of account, a means of payment, and a store of value. The case for CBDC is really on whether it seems to strengthen those functions for users and for central banks.
15/ What does the IMF think about the proliferation of crypto? Brushes it off, since crypto "struggles to fully satisfy the functions of money, in part because of erratic valuations”. Plus, “these currencies are not the liability of any institution and are not backed by assets.”
16/ The IMF paper points to stable coins as examples of cryptocurrencies that "stabilize their value by controlling issuance according to a function of price deviations from a fiat currency or commodity”.
17/ Of course, this is not a surprising narrative from the IMF on cryptocurrencies, given the Central’s Banks’ criteria in evaluating money to begin with, plus literally, it's entire reason for existing...
18/ Note at the end: "Cryptocurrencies are the least attractive [alternative] option, receiving a low score in settlement speed because of current technological limitations...Their main advantage is anonymity.”
No comments from me, just leaving this here for you all.
No comments from me, just leaving this here for you all.
19/ On the public policy side, while central banks could benefit from CBDC to more fully satisfy some of the social criteria of money (I.e. the decreasing use of cash), it’s not better than regulation and faster payment platforms.
20/ A huge cite of concern: financial integrity, which I think pretty much refers to how much control authorities can have over the CBDC, specifically around issues of due diligence (AML) and privacy safeguards.
21/ So ultimately, does CBDC offer net benefits? The IMF concludes that it is too early to draw firm conclusions on the net benefits of CBDC. Plus, it’s not that much more compelling than evolving commercial bank deposits and e-money.
22/ I appreciate that the IMF dedicated the time and resources to do the research and consider this topic, but taking out the cross-border implication out was such a cop-out. Plus there were a lot of assumptions about crypto that were super off base or missed the point.
