International Monetary Fund joins battle for control

These eyebrow-raising events can no longer be dismissed as fringe activities given their direct challenge to the reach and authority of multilateral development organisations such as the IMF.

After a slow start, the IMF is showing a little more stomach for the fight and has promoted synthetic digital currencies linked to fiat, or central bank digital currencies (CBDCs), as bitcoin counterweights.

“If we design digital currencies with caution and with precision, and if we frame their adoption within legal and regulatory systems that maximise their benefits and minimise their risks – then we could be on the verge of an era that fulfils the promise of transformation,” the IMF’s director of monetary and capital markets Tobias Adrian told a Digital Bretton Woods Forum with the London Stock Exchange Group in April 2022.

Mr Adrian suggested two principal ways central banks, their government sponsors and Bretton Woods enforcers could use tech to improve the utility of money and sandbag their positions.

One way is via the type of smart-phone-based eMoney already issued by groups such as China’s WeChat Pay and AliPay, or M-Pesa in Kenya.

This kind of eMoney (as a digital representation of fiat) is conceptually similar to stablecoins because users pre-fund mobile wallets to leverage the benefits of cheaper fees over mobile payment services, the IMF said.

To illustrate the rise of eMoney, China’s tech giants processed $US18.7 trillion in eMoney transactions in a single year, according to the IMF. This was more than the total transaction volumes handled by Visa and Mastercard over the equivalent period.

Mr Adrian said that smartphone-based eMoney could be an acceptable model for synthetic central bank digital currencies, as users still transact in a central bank liability, with associated supervision and regulation.

The model also has advantages over central banks issuing their own digital currencies as it encourages competition between eMoney providers for the provision of services and innovation while maintaining a single unit of account, the IMF said.

Another way is for central banks to issue their own CBDCs to increase financial inclusion in emerging markets and reduce transaction costs, according to Mr Adrian.

However, the IMF policymaker warned this model could damage commercial banks. As it “could lead to a compression of bank margins or to an increase in lending rates, resulting in contraction in credit to the economy”.

Private versus public crypto

In many ways, the IMF and fiat policymakers have slept at the wheel as the risks posed by private cryptocurrencies to their mandates ballooned in front of their face.

In May, a $US26 billion self-styled private stablecoin named Terra collapsed to zero after a dubious peg used to connect its value to the US dollar broke.

The Tether stablecoin boasts a $US74 billion market-cap, but impotent regulators have no assurance it is fully backed by cash or cash-equivalent reserves.

Stablecoins are commonly used in crypto’s siloed world of decentralised finance (DeFi), and the IMF now also wants DeFi regulation.

“DeFi’s anonymity, lack of a centralised governance body, and legal uncertainties render the traditional approach to regulation ineffective,” it conceded in an April paper on financial stability. “As DeFi, stablecoins and traditional financial entities have grown ever more interconnected, enhanced regulatory surveillance and globally consistent regulatory frameworks will be necessary.”

To state the obvious, the horse has bolted. Closing the stable door on private crypto is now impossible and talk is cheap.

Luckily for the IMF, crypto can never replace government-backed money as a source of liquidity or as a stable unit of account to price goods and services, although something like a stablecoin could challenge it as a means to buy and sell things.

The Bretton Woods establishment would probably love to see eMoney as a crypto-killer, but must lift its game dramatically to deliver it.

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