IMF Sees Good Potential In CBDCs But Not A Complete Fit, Federal Reserve Remains Undecided
Global financial institutions have been actively working on the idea of central bank digital currencies (CBDCs) especially after the Coronavirus pandemic. The International Monetary Fund (IMF) published a report today, October 19, clearing further its and on CBDCs.
The financial institution noted that CBDCs can help countries have better control over their monetary policies but they aren’t capable of solving every crisis. The report from IMF talks about different pros and cons of CBDCs along with other policy considerations for a central bank issuing its own digital currency.
IMF noted that CBDC can be considered as just another tool for currency issuance. However, it ads that CBDCs can’t be still considered as a remedy for every world economy.
The report notes: “Overall, the paper finds that CBDCs do not qualitatively change the economic forces that lead to the international use of currencies, as they are only digital forms of existing fiat currencies but quantitatively, they could reinforce the incentives behind currency substitution and currency internationalization”.
The IMF noted that CBDC could be beneficial from a technological standpoint like faster cross-border or domestic payments, a tool for currency substitution, etc. However, it doesn’t change any drastically for already ailing economies with high-inflation and other problems.
“If the local currency suffers from instability and provides a poor unit of account, issuing CBDC is unlikely to change that. More broadly, the case for CBDC issuance is likely to depend on country circumstances,” the report warned.
The IMF adds that one of the biggest benefits that CBDCs bring along is the digital payments system. However, it says that before issuing and adopting CBDCs each country should first check the international treaties governing currency agreements.
The report states: “Authorities will also need to assess whether restrictions on payments in CBDCs are consistent with countries’ obligations under international and bilateral treaties, including the IMF’s Articles of Agreement”.
The report also talks about the entry of private players to launch their own global stablecoins. It notes that such kind of stablecoins can pose risks to the region’s monetary policy, something that the European lawmakers have been stressing recently.
It notes that global stablecoins released by private players can lead to a situation where companies start directing the monetary policies of the country, which should be the other way round ideally.
On the other hand, the Federal Reserve Chairman Jerome Powell said that they haven’t yet decided over issuing the Digital Dollar. In a panel hosted by the IMF, Powell said: “It’s more important for the United States to get it right than to be first. We are committed to carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency for the U.S. economy and payments system. We have not made a decision to issue a CBDC.”
He further added: “There are a number of ways that a CBDC might improve the payments system, and it is mainly this area that motivates our interest”.