The International Monetary Fund joins the battle for control


These eyebrow-raising events can no longer be considered fringe activities given their direct challenge to the reach and authority of multilateral development organizations such as the IMF.

After a slow start, the IMF is showing a little more courage for the fight and has promoted fiat-linked synthetic digital currencies, or central bank digital currencies (CBDCs), as a counterbalance to bitcoin.

“If we design digital currencies with care and precision, and if we frame their adoption within legal and regulatory systems that maximize their benefits and minimize their risks, then we could be at the dawn of an era that delivers on the promise of transformation,” the IMF’s director of monetary and capital markets, Tobias Adrian, said at a Bretton Woods digital forum with the London Stock Exchange Group in April 2022.

Mr. Adrian suggested two main ways for central banks, their government sponsors and Bretton Woods enforcers to use technology to improve the utility of money and trash their positions.

One is to use the type of smartphone-based e-money already issued by groups such as WeChat Pay and AliPay in China, or M-Pesa in Kenya.

This type of e-money (as a digital representation of fiat) is conceptually similar to stablecoins, as users pre-fund mobile wallets to take advantage of the benefits of cheaper fees compared to mobile payment services, the IMF said.

To illustrate the rise of e-money, Chinese tech giants processed $18.7 trillion in e-money transactions in a single year, according to the IMF. This was more than the total volume of transactions processed by Visa and Mastercard over the equivalent period.

Mr. Adrian said smartphone-based e-money could be an acceptable model for central bank synthetic digital currencies, as users are still transacting under a central bank responsibility, with oversight. and associated regulations.

The model also has advantages over central banks issuing their own digital currencies as it encourages competition among e-money providers for service provision and innovation while maintaining a single unit of account, the IMF said.

Another way is for central banks to issue their own CBDCs to increase financial inclusion in emerging markets and reduce transaction costs, according to Adrian.

However, the IMF policymaker warned that this model could harm commercial banks. Because this “could lead to a compression of bank margins or an increase in lending rates, leading to a contraction of credit to the economy”.

Private versus public crypto

In many ways, the IMF and policymakers have been asleep at the wheel as the risks posed by private cryptocurrencies to their mandates skyrocketed in front of their faces.

In May, a so-called $26 billion private stablecoin named Terra collapsed to zero after breaking a dodgy peg used to peg its value to the US dollar.

The stablecoin Tether boasts a market capitalization of $74 billion, but helpless regulators have no assurance that it is fully backed by cash or cash equivalent reserves.

Stablecoins are commonly used in the siled decentralized finance (DeFi) world of crypto, and the IMF now wants DeFi regulation as well.

“DeFi’s anonymity, lack of a centralized governance body, and legal uncertainties make the traditional approach to regulation ineffective,” he conceded in an April post on financial stability. “As DeFi, stablecoins and traditional financial entities are increasingly interconnected, enhanced regulatory oversight and globally consistent regulatory frameworks will be needed.”

To state the obvious, the horse ran away. Closing the stable door on private crypto is now impossible and talking is cheap.

Luckily for the IMF, crypto can never replace government-backed money as a source of liquidity or as a stable unit of account for pricing goods and services, although something like a stablecoin can challenge it as a means. to buy and sell things.

The Bretton Woods establishment would probably like to see eMoney as a crypto killer, but need to significantly up their game to deliver it.


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