Fiat Will Face Tough Competition & Could Even Be Surpassed: IMF On “The Rise Of Digital Money”
- Banks will feel pressure from e-money, new entrants may even become banks themselves
- Standard deviation of day-to-day changes in Bitcoin prices is about 10 times higher than in most G7 currency pairs
- Banks will have to adapt, some will be left behind no doubt
- CBDC is “perfectly stable” as a store of value but central bank money cannot be redeemed against anything
In its latest paper “The Rise of Digital Money,” released July 15, that marks the launch of a new series Fintech notes, IMF analyses how technology companies are stepping up the competition to credit card companies and large banks.
“Banks will feel pressure from e-money,” states the paper adding that policymakers should be some disruption in the banking landscape. These new entrants may even “become banks themselves.”
The paper also argues that
“The two most common forms of money today will face tough competition and could even be surpassed.”
Cryptocurrencies Are Riskier But Offer Higher Returns
Talking about the different means of payments, it covers them in five categories, central bank money, cryptocurrency, b-money (currently issued by banks), electronic money (offered by new private sector providers), and investment money (issued by private investment funds).
While stablecoins are economically similar to a private investment fund guaranteeing redemptions at face value, cryptocurrency, the paper states are “by far riskier, though it potentially offers higher returns (capital gains).”
It illustrates how the standard deviation of day-to-day changes in Bitcoin prices is about 10 times higher than in most G7 currency pairs and even more so much higher than in the Venezuelan Bolivar to U.S. dollar exchange rate.
Will Banks Survive?
However, decentralized technologies it says raises new challenges in terms of anti money laundering and counter-terrorism financing (AML/CFT) obligations.
Due to the number of entities involves being very large and fragmented, enforcement of AML/CFT obligations becomes difficult. This means international cooperation will become all the more relevant to avoid regulatory arbitrage and a dilution of regulation.
The evolving payments industry means banks would have to adapt, but will they do so fast enough?
“Some will be left behind no doubt. Others will evolve, but must do so quickly.”
Here, the central banks can help, points out the author but not for long.
As for Central Bank Digital Currency (CBDC), it is “perfectly stable” as a store of value but central bank money cannot be redeemed against anything. Moreover, there are plenty of countries with weak fiscal positions whose currency is wiped out through hyperinflation.
So, the author suggests a different approach called “synthetic CBDC” where the central bank would merely offer settlement services to e-money providers and all other functions would be the responsibility of private e-money providers under regulation.