Christine Lagarde and the IMF - Are They Proposing a New Global Digital Currency?

The short answer is no. At least not any time soon. The IMF releases this new study on the prospects for central bank digital currencies (CBDC's) and Managing Director Christine Lagarde offered her thoughts on the subject in this recent speech. Below are a few excerpts from each and then a few added comments.

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From the speech by Managing Director Lagarde:

In this context, I would like to do three things this morning:

• First, frame the issue in terms of the changing nature of money and the fintech revolution.
• Second, evaluate the role for central banks in this new financial landscape—especially in providing digital currency.
• Third, look at some downsides, and consider how they can be minimized.

. . . . . .

Conclusion

Let me conclude. I have tried to evaluate the case this morning for digital currency.

The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.

More fundamentally, the case is about change—being open to change, embracing change, shaping change.

Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.

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From the newly released IMF study on Central Bank Digital Currencies:

VII. CONCLUSION

-  CBDC could be the next milestone in the evolution of money. The history of money suggests that, while the basic functions of money might not change, the form does evolve in response to user needs. Digitalization of many aspects of economic activity is prompting central banks to seriously consider the introduction of CBDC.

-  CBDC is a digital form of existing fiat money, issued by the central bank and intended as legal tender. It would potentially be available for all types of payments and could be implemented with a variety of technologies. 

- Overall, the note finds no universal case for CBDC adoption as yet. From the perspective of end user needs, it finds that demand for CBDC will depend on the attractiveness of alternative forms of money. In advanced economies, there may be scope for the adoption of CBDC as a potential replacement for cash for small-value, pseudo-anonymous transactions. But in countries with limited banking sector penetration and inefficient settlement technology, demand for CBDC may well be greater.

- From a central bank perspective, the case for CBDC is likely to differ from country to country. CBDC may reduce the costs to society that are associated with the use of cash. Moreover, CBDC may improve financial inclusion in cases of unsuccessful private sector solutions and policy efforts. It could also help central banks bolster the security of, and trust in, the payment system and protect consumers where regulation does not adequately contain private monopolies. But regulation and, where possible, novel payment solutions could offer compelling alternatives to a CBDC.

- For countries that decide to introduce CBDC, appropriate design and policies should help mitigate ensuing risks. Monetary policy transmission is unlikely to be significantly affected and may even benefit from greater financial inclusion. Moreover, though it will not eliminate illicit activity, CBDC may in some situations enhance financial integrity. However, it also entails risks for financial integrity if badly designed. In addition, although CBDC could increase the cost of funding for deposit-taking institutions and intensify run risk in some jurisdictions, design choices and policies can help ease such concerns. Nevertheless, operational and reputational risks arising from malfunctions of the digital infrastructure or cyberattacks are likely to remain as challenges.

- Looking ahead, the cross-border implications of CBDC raise a multitude of new questions that merit investigation. For instance, from a practical standpoint, how would tourists be able to make payments in a foreign country that has adopted CBDC? Should foreigners have access to CBDC? To what extent would this complicate know-your-customer and AML/CFT compliance, and could standardized information be requested across countries? Would access to CBDC in a reserve currency (such as e-dollars) facilitate currency substitution in countries that have weak institutions? And to what extent might safe-haven flows be encouraged, potentially draining resources from countries that face banking, sovereign, or currency crises? Finally, if CBDC were used for cross-border transactions, how might central banks be required to cooperate? Would they absorb some of the functions of correspondent banks and thus take on additional liquidity, credit, and foreign exchange rate risk—or might tokens be created for cross-border payments among particular central banks, commercial banks, or firms? Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications.

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My added comments: At first glance, if you have not followed this topic for any length of time, it may appear that we have a bold new initiative from the IMF endorsing the use of central bank digital currencies within nations at first and later perhaps a new digital global reserve currency. Director Lagarde sounds somewhat like an enthusiastic supporter of the concept in her speech.

However, this is a topic we have covered here almost absurdly in depth. We even tossed out the idea of some kind of new digital global reserve currency that everyone might use from their cell phone a long time ago on this blog. Even before that we explored the idea of using the SDR for something like that. So this is not new ground here.

Digging into the conclusion section of the actual IMF study, I listed most of the key conclusions above and added bold type and underlines to some points I wanted to emphasize. Looking at these key points, it is clear that the IMF is not proposing a new global central bank currency like we have talked about here for some time any time soon. Rather this study focused on individual national central banks potentially issuing a digital version of their own national currencies and listed some pros and cons. This has been done over and over again around the world by individual central banks such as the BOE as well. 

The concept clearly gets a lot of attention and study, but nothing in these studies ever suggests that any major central bank is close to moving forward with actually implementing the idea. And it seems pretty clear from this new study that the IMF sees that as having to take place first before any kind of new global digital currency (like an e-SDR for example) might be considered. The study does go on to relist a number of problems and challenges to the idea that still have to be overcome as well.

None of this suggests to me that we are on the verge of anything like this happening soon. Clearly, the idea exists and has not been abandoned. But nothing in this new report suggests any further progress toward actual implementation has been made. 

The final words of the conclusion are: "Research on CBDC should proceed resolutely given that the questions to be explored are deep and difficult and have far-reaching implications."

Does that sound like a new digital global reserve currency is just around the corner? 

So I view this new study as just more of the same with no new information of substance provided from what we have already covered here in depth. But you can read through the entire IMF study to see if you agree or disagree with my conclusion on that.

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Added note: This CNBC article adds a bit of extra information including the fact that Sweden may test a CBDC sometime in 2019.