Cash & Liquidity ManagementLiquidityCBDCs could become reality: IMF Survey

CBDCs could become reality: IMF Survey

IMF believes that central banks may issue digital currencies in the future and CBDCs could become reality. However, work is in the early stages

Some central banks are on the brink of piloting central bank digital currencies (CBDCs), while some have already began on a limited scale, according to the International Monetary Fund (IMF).

The IMF and World Bank surveyed central banks, finance ministries, and other relevant agencies on a range of topics related to fintech. The survey reveals wide-ranging views of countries on CBDCs.

The announcement was made through a recent blog by IMF about the a new paper which details the results of the survey alongside findings from other regional studies. The paper also identifies areas for international cooperation—including roles for the IMF and World Bank—and in which further work is needed by governments, international organizations, and standard-setting bodies.

The survey solicited answers from financial institutions within all member countries, and has based its conclusions in part upon the 96 received responses.

Limited-scale pilots and testing

A few central banks like Uruguay have issued CBDCs as limited-scale pilots while the Bahamas, China, Eastern Caribbean Currency Union, Sweden and Ukraine are on the verge of testing their systems.

But even then, work is in early stages; only four pilots were reported. The main reasons cited in favor of issuing CBDCs are lowering costs, increasing efficiency of monetary policy implementation, countering competition from cryptocurrencies, ensuring contestability of the payment market, and offering a risk-free payment instrument to the public.

Most central banks, however, are not interested in issuing an entirely anonymous CBDCs. This is owing to the reason that the institutions want transactions to ultimately be traceable by authorities when necessary. Some of these institutions are considering portioning off a subset of tokens reserved for large holdings and transactions, and only making those ones traceable.

Varied motivation for offering CBDCs

Both emerging economies as well as developed economies are said to be considering CBDCs options.

Developed countries are seeking to provide an alternative to cash as its frequency of use dwindles. For emerging economies in developing countries, the main interest for CBDCs would be reducing banking costs, as well as potentially making banks more available to unbanked citizens.

Several national central banks have recently been discussing the idea of creating a digital version of their fiat currency. The Bank of Japan has provided in-depth research on the benefits and outcomes of CBDCs integration within the existing financial system.

A working paper from the National Bureau of Economic Research (NBER) claims that a generic framework that nests many—and most standard—models of money, liquidity, and financial frictions is the way forward.

The skeptics

The European Central Bank seemingly does not see any benefits of using blockchain technology, having dismissed any plans to do something similar for the European Union with a euro-based digital currency. In May 2018, ECB board member Yves Mersch had said that banks should segregate their dealings in cryptocurrencies from other activities.

In May, European Central Bank (ECB) President, Mario Draghi, had claimed that cryptocurrencies are assets and not currencies when recently questioned about his stance on Bitcoin – and that there are no plans for a centralised euro-based CBDCs.

He had further added: “I would say that it is more something that falls within the field of consumer protection. We want to ensure that buyers of these assets know what they are doing, and are aware of the risks.”

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