States Should Issue Central Bank Digital Currencies, IMF Head Says

Christine Lagarde has outlined several pros and cons about CBDCs in a keynote speech during Singapore’s fintech festival.

The head of International Monetary Fund (IMF), Christine Lagarde, has endorsed the idea of central bank digital currencies (CBDCs) - virtual coins created by state authorities in a centralized way similar to the issuing of fiat currencies. The governments should move in this area by taking into account several concerns including preventing criminals from using CBDC as a tool to hide their illegal activities, the IMF Managing Director said on Wednesday.

Lagarde delivered a speech, dubbed “Winds of Change: The Case for New Digital Currency,” during a fintech festival in Singapore. Addressing the declining usage of cash, the IMF boss said:

“I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy,” Lagarde told attendees.

CBDCs can fulfill three main public goals: providing citizens with financial inclusion, security, and guaranteeing consumer protection privacy in payments. For example, central bank digital currencies can offer more reliable security measures than private virtual coins’ players, Lagarde said.

“[] private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure,” IMF Managing Director outlined.

However, CBDCs come with three major areas of concerns, according to Lagarde: risks regarding financial integrity, the stability of the economic system, and the possibility of deterring innovation. To meet those challenges, governments should enact proper anti-money laundering (AML) rules and guarantee that consumer identities would be disclosed only in cases required by the law. Also, state authorities should offer public-private cooperation so that central banks would not occupy all CBDC-related services - from digital wallet to token, to back-end settlement - and stop innovation in that way.

“What if, instead, central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over, Lagarde explained.

“Putting it another way: the central bank focuses on its comparative advantage—back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation.”

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