This article is the first in what will be a three-part series. In this first installment, we’re going to address the IMF’s perspective concerning the evolution of global currencies and the technologies driving change. In the follow-up installment, we’ll explore the underlying technologies themselves and their promise of a brighter, more secure future. In the final installment, we’ll discuss real-world applications for the technologies and how their promise of security is fraught with potential for something far more nefarious.
So, who is the IMF (International Monetary Fund) and why does their outlook matter? The IMF is a cooperative body created in 1944 and ratified in 1945 to facilitate international trade, the integrity of the global financial system, and currency exchange rates. It all began at the 1944 United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, partly in response to the lack of consumer confidence in banking after the Great Depression and ensuing bank runs. Today, membership is nearly global with 189 of the 193 fully recognized states in its membership.
The monetary system the Bretton Woods conference created was originally backed by gold, with each sovereign currency valued against the set price of gold and convertible into U.S. Dollars. In 1971, President Nixon unilaterally abolished the gold standard, untethering currencies from any tangible asset, so each sovereign currency either floated in value (exchange rate) against competing currencies or pegged its value to a specific currency, such as the U.S. Dollar. That system of float and peg, also known as a debt-based fiat system, still remains with the U.S. Dollar acting as the primary reserve currency for international trade.
For years, the IMF has been trying to maneuver its own global currency, the Special Drawing Right (SDR), into a position of prominence for world trade, but it has been unsuccessful. The SDR is valued in U.S. Dollars by combining the exchange rates of five sovereign currencies: U.S. Dollar, Euro, British Pound Sterling, Japanese Yen, and Chinese Renminbi. Currently (01-29-2019), the U.S. Dollar equals .72 SDR.
Now that the IMF is actively engaged in finding alternatives to traditional fiat currencies, how much longer will we be able to use physical cash?
Although the answer to that question is uncertain, the IMF’s June 2018 edition of Finance & Development magazine (below) specifically addresses the role of physical currency in the digital age, especially as it pertains to the rise of crypto-currencies along with the utility of e-payments. A consolidated summary would read, physical currencies are becoming irrelevant so e-payments and blockchain technology are good but crypto currencies are bad.IMF Finance & Development - June 2018
Stefan Ingves, Governor of Sweden’s Central Bank, laments the decline of state-issued currency, and, while minimizing the legitimacy of crypto currencies, asserts the possibility of central banks issuing their own digital currencies.
If banknotes and coins have had their day, then in the near future, the general public will no longer have access to a state-guaranteed means of payment, and the private sector will to a greater extent control accessibility, technological developments, and pricing of the available payment methods. It is difficult to say at present what consequences this might have, but it will likely further limit financial access for groups in society that currently lack any means of payment other than cash. Competition and redundancy in the payments infrastructure will likely be reduced if the state is no longer a participant. Today, cash has a natural place as the only legal tender. But in a cashless society, what would legal tender mean?
In this regard, one might ask whether central banks should start issuing digital currency to the public. (Source: Ingves, Stefan. “Going Cashless.” Finance & Development, vol. 55, no. 2, June 2018, p. 12)
Please note that as part of his argument, Mr. Ingves says the elimination of cash “will likely further limit financial access for groups in society that currently lack any means of payment other than cash.” Unfortunately, that seems to contradict what he wrote earlier:
In several Asian and African countries—for example, India, Pakistan, Kenya, and Tanzania—paying by mobile phone instead of cards or cash is commonplace.
Given that the role of a central bank is to manage the money supply, these developments potentially have wide-ranging consequences. Are central banks needed as issuers of a means of payment in a modern digital payments market? (Source: Ingves, Stefan. “Going Cashless.” Finance & Development, vol. 55, no. 2, June 2018, p. 11)
Both Christine Lagarde, Managing Director of the IMF, and Martin Mühleisen, Director of the IMF’s Strategy, Policy, and Review Department, echo the advances of developing economies in Kenya and China regarding cashless payments.
Indeed, it is striking that less-developed countries are leading technology in many areas, such as mobile payments (Kenya), digital land registration (India), and e-commerce (China). These countries facilitated the quick adoption of new technologies because, unlike many advanced economies, they weren’t bogged down in preexisting or antiquated infrastructure. (Source: Mühleisen, Martin. “The Long and Short of the Digital Revolution.” Finance & Development, vol. 55, no. 2, June 2018, p. 8)
In Kenya and China, mobile payment systems have brought millions of previously “unbanked” people into the financial system. (Source: Lagarde, Christine. “A Regulatory Approach to Fintech.” Finance & Development, vol. 55, no. 2, June 2018, p. 9)
The problem isn’t access to payment systems by those who may be limited. The problem for central banks is that they may lose control of the money supply. In the end, it’s really more about control than it is about the form of payment or currency itself. The government can’t allow private enterprise to find a solution to the monopoly they control and the power they wield via fiat currency.
In “A Regulatory Approach to Fintech” (p. 10), Christine Lagarde also wrote the following: “To do our jobs properly, we must understand the innovative technologies, learn from them, and perhaps even adopt some of them to improve regulation, supervision, and surveillance” (emphasis mine).
In the speech below, also accompanied by her prepared text further below, Director Lagarde provided the following summary regarding the need to adapt to the need for digital currencies.
Let me conclude. I have tried to evaluate the case this morning for digital currency.
The case is based on new and evolving requirements for money, as well as essential public policy objectives. My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.
More fundamentally, the case is about change—being open to change, embracing change, shaping change.
Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.
In the world of Fintech, we need to harness change so it is fair, safe, efficient, and dynamic. That was the goal of the Bali Fintech Agenda launched by the IMF and World Bank last October.
Full Text: Winds of Change: The Case for New Digital Currency111418-md-sg-fintech-speech
Two key highlights of the Bali Fintech Agenda are below, with the full text further below.
II. Enable New Technologies to Enhance Financial Service Provision by facilitating foundational infrastructures, fostering their open and affordable access, and ensuring a conducive policy environment. Foundational infrastructures include telecommunications, along with digital and financial infrastructures (such as broadband internet, mobile data services, data repositories, and payment and settlement services). The infrastructures should enable efficient data collection, processing, and transmission, which are central in fintech advances. …
XII. Enhance Collective Surveillance of the International Monetary and Financial System and the adaptation and development of policies to support inclusive global growth, poverty alleviation, and international financial stability in an environment of rapid change. Fintech is blurring financial boundaries—both institutionally and geographically—potentially amplifying interconnectedness, spillovers, and capital flow volatility. (emphasis mine)
Full Text: Bali Fintech Agendapp101118-bali-fintech-agenda
Maybe the perceived evolution of currency is why government programs were created to provide free cell phones and service to the “financially disadvantaged” here in America even before the Bali Fintech Agenda. The growing popularity of mobile payments certainly fits well with the promise of 5G cellular technology, which is being rolled out in 2019.
As we close this installment, there is a consistent theme between the IMF and the Bali Fintech Agenda concerning oversight and surveillance as the policymakers consider (1) how to effectively delegitimize crypto assets while (2) legitimizing its underlying blockchain technology and cryptography, so they may (3) create digital currencies of their own.
Below, is a quote from Dong Ho, Deputy Director of the IMF’s Monetary and Capital Markets Department.
For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities. (Source: Ho, Dong. “Monetary Policy in the Digital Age.” Finance & Development, vol. 55, no. 2, June 2018, p. 14)
Make no mistake, the policy makers like the technology. They simply don’t like the fact that they can’t control the current crypto asset landscape. Stay tuned for our next installment.