The International Monetary Fund (IMF) is continuing to explore the potential of digital currencies and distributed ledger technology (DLT) .
In a staff discussion note released this week, entitled “Fintech and Financial Services: Initial Considerations”, the IMF places an emphasis on two impact areas: the use of the technology for cross-border payments and its potential to be leveraged as part of a central bank-backed digital currency.
The first note published by the IMF this year, it follows in the footsteps of a similar publication issued last January. As such, this paper touches on many familiar topics and themes, including how the technology could come to bring change to financial services.
Still, while familiar topics including the impact of permissioned and permissionless versions of the technology perhaps saw the most airtime, newer concepts are touched on for the first time as well.
In particular, the IMF hints at how blockchain-based ‘digital tokens’ are now being used to represent securities and ownership rights through so-called initial coin offerings (ICOs), though it stops short of any formal statements on the matter.
The paper reads:
“The legal status of a digital token, and the legal effect of its transfer are not clear. For example, would the transfer of an asset-backed token (eg, representing a security) on a ledger transfer legal ownership of the security or would registration outside the ledger (eg, in a corporate share registry) still be required?”
The IMF goes on to speculate that answers to these questions would likely vary by country and jurisdiction, but that the question of how such uses of the technology will be regulated is likely to be on the minds of policymakers in the years ahead.
The discussion note was co-authored by nine IMF staff members, including Dong He, deputy director of IMF’s Monetary and Capital Markets Department.
Central bank coins
Other major 2017 trends see discussion too, including the increasing activity in the sector of global central banks. Encouraged by the developments in DLT, central banks including Bank of Russia, Bank of India, and The Monetary Authority of Singapore are researching and experimenting with the possibility of a central bank-issued digital currency.
As a result, the IMF paper considers two questions regarding the prospect: “Why would a central bank want to issue a digital currency?” and “What form could such a currency take and how would it be distributed?”.
Overall, there are two main reasons for issuing a central bank-backed digital currency, the paper states, the first of which is that it could improve the institution’s operations.
“Introducing a CBDC may allow the central bank to perform its role in insuring an effective payments infrastructure, including the issuance of currency and the provision of a lender of last resort function, more efficiently,” the paper reads.
In addition, the paper speculates that such innovations could leverage central bank networks more defensively as a means of warding off innovation:
“The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy. A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system.”
Ripe for change
Elsewhere, the paper points out that the area of cross-border payments is especially ripe for change, and could benefit from such new technologies.
It argues that the model of cross-border payments services today exhibits significant shortcomings, outlining how various stakeholders engage with consumers today. Different from domestic payments, which are settled by domestic banks and central banks, cross-border payments usually require ad-hoc arrangements, often between commercial banks.
As such, the authors argue that blockchain and DLT could bring an internet-like upheaval to how this process is conducted.
“In the age of the internet, instead, there is no distinction between a message going to a domestic or foreign recipient; both take a click. A message is a message; might a payment just be a payment in the future?” it reads.