IMF Evaluates Pros and Cons of a Central Bank Digital Currency

IMF Evaluates Pros and Cons of a Central Bank Digital Currency

The International Monetary Fund (IMF) is evaluating the positives and negatives of introducing a central bank digital currency (CBDC). This is clear after a recent keynote speech by the IMF’s Deputy Managing Director, Tao Zhang.

IMF ponders pros and cons of CBDCs

Zhang made the speech to the London School of Economics on February 28th, and went into detail regarding the pros and cons of a central bank digital currency. Zhang highlights some of the efficiency gains potentially held by CBDCs:

“In some countries, the cost of managing cash can be very high on account of geography, and access to the payments system may not be available to the unbanked, rural or poorer population.”

Additionally, Zhang also said that a central bank digital currency could provide the means of greater financial inclusion. “[A] CBDC may provide a public digital means of payment without requiring individuals to hold a bank account,” Zhang explained.

Could CBDCs combat crypto?

What’s more, the IMF director argues CBDCs could hold the key to stronger monetary policy and greater stability. Zhang also floats the idea that a CBDC could combat the rise of cryptocurrencies such as Bitcoin:

“A domestically issued digital currency backed by a trusted government, denominated in the domestic unit of account, may help limit the adoption of privately issued currencies (e.g. stablecoins), which may be difficult to regulate and could pose risks to financial stability and monetary policy transmission.”

Put simply, a CBDC would be a central bank’s response to a cryptocurrency. The International Monetary Fund carries significant weight in the international community, as it consists of 189 countries working together.

Central banks could face challenges releasing CBDCs

As such, a potential decision by the IMF to support CBDCs would be big news. Although this is still just speculation, it is encouraging to see the IMF actively thinking about CBDCs. Some observers suggest that an eventual CBDC could be inevitable as crypto adoption surges.

If this is the case, the International Monetary Fund would be a powerful actor in dictating the future of CBDCs. With that said, Zhang also notes that there are some drawbacks to CBDCs. For example, Zhang argues that it would be costly for central banks to develop and introduce.

“Offering full-fledged CBDC requires central banks to be active along several steps of the payments value chain, potentially including interfacing with customers, building front-end wallets, picking and maintaining technology, monitoring transactions, and being responsible for AML/CFT issues.”