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IMF Highlights the Pros and Cons of Introducing a CBDC

IMF Highlights the Pros and Cons of Introducing a CBDC

The International Monetary Fund (IMF) highlights the pros and cons of the introduction of a central bank digital currency (CBDC). According to the IMF, the CBDC is very promising, especially for developing countries.

23 March, 2020 | AtoZ Markets – Central banks around the world started to actively seek a way to stem the massive adoption of cryptocurrencies such as Bitcoin. The CBDCs are not an innovation introduced by these central authorities for the selfless benefit of their users. But, central banks now understand that blockchain assets threaten to make them obsolete, and CBDCs are a desperate attempt to introduce viable competition.

Benefits of Digital Currency Emphasized

In a recent speech at the London School of Economics, the deputy managing director of the IMF, Tao Zhang, highlights the pros and cons of a CBDC. He said that as a new asset class, they hold great promise, especially for the developing world.

He highlighted the many advantages that these currencies can bring to the financial space. In particular, it allows fast and smooth transfers and by providing financial services to unbanked people. Zhang pointed to the increased efficiency and lower costs associated with a CBDC. “In some countries, the cost of managing liquidity may be very high due to geography. The access to the payment system may not be available for unbanked, rural or poor populations,” he said.

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The IMF director addressed the issue of increased financial inclusion. “The CBDC can provide a public digital means of payment without requiring individuals to have a bank account,” he said. He also noted several other benefits of a CBDC, including stability and a strengthened monetary policy.

However, he notably said that a revolution is underway in the global economy and that central banks must innovate to avoid being obsolete. Specifically, he said the CBDCs had the potential to stem the growing popularity of stable coins. ” It may be difficult to regulate and could pose risks to financial stability and the transmission of monetary policy.”

Read More: Crypto Exchange Binance Moved 76K Bitcoin for Just $1.50 Fee

IMF Mentioned the Negative Side of a CBDC

Zhang stressed the importance of the proposed structure for the CBDC to limit potential risks. The director said such an asset could divert customers from banks, as well as strain the balance sheets of central banks.

Zhang also said the central bank might face risks and expenses as a result of the initiative. “Offering the CBDC could be very costly for central banks, and it could pose reputational risks,” he said.

An interesting suggestion was the possibility of banks creating fiat-backed digital currencies, which Mr. Zhang called “synthetic CBDCs”. These tokens would allow the banking industry to take on the challenges of managing these digital assets, for example, enforcing anti-money laundering regulations and KYC. The tokens would have the backing of a trusted central bank.

Zhang added that hackers and other flaws could hamper these operations, which would have the effect of putting a black mark on the reliability of the bank.

The open, borderless and anonymous nature of the cryptocurrency cannot be replicated by any asset controlled by the central bank, even if it were digital. Most fiat currencies already used in digital form. The private banking sector has recognized this fact and is now taking steps to form business models around blockchain technology. Perhaps the best decision by central banks will be to recognize the changes ahead. Central banks will begin to legitimize this new asset class rather than seek to undermine it.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ Markets.com, nor should they be attributed to AtoZMarkets.

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