17 December 2017
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IMF chief says banks would be unwise to dismiss the threat from virtual currencies

03 October 2017  |  9473 views  |  0 Christine Lagard, IMF

IMF managing director Christine Lagard believes virtual currencies might just give existing currencies and monetary policy a run for their money.

Speaking to an audience of central bankers at the Bank of England, Lagard extolled the virtues of virtual currencies as an alternative to pounds and dollars.

"Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities," she said. "If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender."

While acknowledging that virtual currencies such as Bitcoin currently pose little or no challenge to the existing order of fiat currencies and central banks, Lagard considers the underlying volatility and riskiness of cryptocurrencies as mere technological challenges that could be addressed over time.

"Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays," she noted. "So I think it may not be wise to dismiss virtual currencies."

In countries with weak institutions and unstable national currencies it may be preferable to move to a digital currency rather than adopting the currency of another country such as the US dollar.

"IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential," she said. "In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008."

Probing further into the world of digital banking, Lagard addressed the possible break-up or unbundling of banking services and the implication of such a shift in regulatory practices.

"Traditionally, regulators have focused on overseeing well-defined entities. But as new service providers come on stream in new shapes and forms, fitting these into buckets may not be so easy," she said. "Think of a social media company that is offering payments services without managing an active balance sheet. What label should we stick on that?

All this is good for lawyers, but not so good for regulators. The regulators will likely have to further expand their focus, from financial entities to financial activities — while possibly also becoming experts in assessing the soundness and security of algorithms. Easier said than done."

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