Virtual currencies and their underlying technologies are seen as a important advance for the financial services sector, but achieving a balanced regulatory framework that guards against risks without suffocating innovation is a challenge that will require extensive international co-operation, says the International Monetary Forum (IMF) in a report presented during the World Economic Forum meeting in Davos.
provides an overview of virtual currencies, how they work and how they fit into monetary systems, both domestically and internationally. The paper also sets out principles for the design of regulatory frameworks for digital currencies at both the domestic and international levels.
A key conclusion of the paper is that the distributed ledger concept has the potential to change finance by reducing costs and allowing for deeper financial inclusion in the longer run. This could be especially important for remittances, where transaction costs can be high, says the report, and in shortening settlement timescale in securities markets.
“Virtual currencies and their underlying technologies can provide faster and cheaper financial services, and can become a powerful tool for deepening financial inclusion in the developing world,” says IMF managing director Christine Lagarde. “The challenge will be how to reap all these benefits and at the same time prevent illegal uses, such as money laundering, terror financing, fraud, and even circumvention of capital controls.”
A previous report by the Reserve Bank of Australia last year suggested that regulatory intervention in the digital currency marketplace would need to be co-ordinated by an international body such as the Basle-based Bank for International Settlements.
The IMF paper coincides with news from Bloomberg that China’s central bank is studying the prospects of issuing its own digital currency and aiming to roll out a product as soon as possible, contending that alternative payment systems can improve the efficiency of global transactions.
The People’s Bank of China set up a research team in 2014 to study digital currencies and application scenarios, according to a statement posted on the regulator’s website. The PBOC said it has consulted with experts from Citigroup. and Deloitte, though it didn’t specify what technology it would be using to issue its digital currency or how it would work in relation to the yuan.