Thursday, October 5, 2017

Christine Lagarde - IMF Should Be Open to Considering a Digital Version of the SDR

In this new speech at the Bank of England in London, IMF Director Christine Lagarde asks the audience to fast forward to the year 2040 to see what the world of central banking might look like. Interestingly, most everything she talks about in this future look has been covered here on this blog for some time. Below are some excerpts and then a few added comments.

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. . . . 

"And much has changed for the bankers and policymakers here in the City of London. But that is only the beginning. Let us spin the hands ofBig Ben forward to 2040 to catch a glimpse of their world. We might see that:
· Cars have disappeared, because people are moving about in hovering drones, or “pods,” which elegantly avoid each other in the morning rush hour.
· One of those pods carries the central bank governor, who recently started her second term. As part of her morning routine, she swipes through a hologram of news videos curated by a digital assistant, before arriving at Threadneedle Street.
· The governor disembarks, walks up to the columned fa├žade, opens the door and…
Who will she encounter inside the building? Are there economists sitting at desks, debating policy choices around a table? Or is there an intelligent machine making decisions, setting rates, and issuing money?
In other words, how will fintech change central banking over the next generation? That is the focus of my remarks today."
. . . . 
"Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.
Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.
For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.
But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies."
. . . . 
"So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve."
. . . . 
"Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."
. . . . 
Cooperation is key
"To make things smoother—at least a bit—we need dialogue. Between experienced regulators and those regulators that are just beginning to tackle fintech. Between policymakers, investors, and financial services firms. And between countries.
Reaching across borders will be critical as the focus of regulation widens—from national entities to borderless activities, from your local bank branch to quantum-encrypted global transactions.
Because of our global membership of 189 countries, the IMF is an ideal platform for these discussions. Technology knows no borders: what is home, what is host? How can we avoid regulatory arbitrage and a race to the bottom? This is about the IMF’s mandate for economic and financial stability, and the safety of our global payments and financial infrastructure.
The stakes—and gains—from cooperation are high. We want no holes in the global financial safety net, however much it gets stretched and reshaped.
I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR.
In other words, the IMF is in for the pod-ride."
. . . . 
Conclusion
As our pod journey comes to an end, some of you may wonder about my upbeat tone. For many, this new world of central banking is less Mary Poppins, and more Aldous Huxley: a “brave new world,” much like the one described in Huxley’s famous novel.
I believe that we—as individuals and communities—have the capacity to shape a technological and economic future that works for all. We have a responsibility to make this work.
That is why I prefer Shakespeare’s evocation of the brave new world in The Tempest: “ O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world .” 
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My added comments: It's interesting to see Director Lagarde talking about the future of virtual currencies in ways similar to what we have talked about here. When we first wrote about this concept (a central bank or IMF digital currency everyone could own), it seemed like there was not much talk about it anywhere else that I could find. But now we see it pretty much everywhere. While it sounded very strange at first, perhaps it will turn out like things we saw on the original Star Trek TV series a long time ago and assumed were just figments of some writer's imagination and would never really show up in the real world. Director Lagarde mentions the year 2040 in her speech.


Image result for star trek hand walkie talkie



I am pretty sure that the one paragraph in this speech that will get a lot of attention is this one:
"I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR."  (bold emphasis and underline is mine)
And we have talked about this very thing here for a long time. We have even pointed out that in order for the SDR to be used in this way in the future, the IMF will have to approve changes in the status quo (Director Lagarde says "be open to change").
While many will leap on this to assume that a new blockchain based SDR is waiting in the wings ready to be launched very soon, I do not believe this to be the case. As we have said here many times, something like this is possible in the future. We have a full page of articles archived here over the past several years that talk about this kind of thing. 
But the best information I have suggests that this process is likely to unfold gradually over a long time frame (unless a new major global crisis forces events to move more quickly). Note that in this speech Ms. Lagarde talks about the year 2040. That timing might be a bit long, but probably closer to reality than the idea that in the next year we will see a new blockchain based digital SDR launched. Absent a crisis, this is the way I can see this unfolding over time:
2018 - we see the first central bank digital currency launched (perhaps in Singapore)
Following this, we might see some other smaller central banks follow suit and issue central bank digital currencies in what we might view as trial runs to see how well the technology functions in the real world and how the public accepts it.
Next three to ten years - more and more individual central banks adopt central bank digital currencies (depending upon how well the trial runs turn out). Some of the major central banks come on board during his phase.
After all this (if it actually happens), we might then see the IMF think about trying to implement some kind of digital version of the SDR if central banks around the world have been successful in their efforts with central bank digital currencies. 
I think the IMF is more likely in the short run to look for ways to get broader use of the SDR and to promote the use of the so called "private SDR" as first step. The private SDR is not widely used at this time around the world and the official SDR can only be used within the IMF structure.
The IMF has a lot of questions to continue to study in regards to the SDR and of course any significant change to the way the official SDR is issued needs approval by IMF member vote. The US continues to hold veto power over any such votes taken at the IMF.
This time table could speed up of course. It might move faster on its own or another major crisis could force some kind of global monetary conference where major changes might be agreed to in response to the crisis. But, absent such a crisis, I think it is more realistic to look at these kinds of changes as taking place over many years starting with a few central banks testing out central bank digital currencies first.

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