Cash and bank deposits face tough competition from, and could even be surpassed by, e-money provided by the likes of Alipay and Facebook, says a new International Monetary Fund (IMF) paper.
With Facebook's Libra project dominating the news, the IMF Fintech Note on the rise of digital money explores how traditional forms of money are being challenged by new digital forms and what implications this has for banks and regulators.
"Cash and bank deposits will battle with e-money, electronically stored monetary value denominated in, and pegged to, a common unit of account such as the euro, dollar, or renminbi, or a basket thereof," predict the authors.
While e-money may be convenient for payments, the paper raises questions over the stability of its value. "It is, after all, economically similar to a private investment fund guaranteeing redemptions at face value. If 10 euros go in, 10 euros must come out. The issuer must be in a position to honor this pledge."
The paper offers some encouragement to banks facing this new competition, arguing that they can offer their own similar products. But policymakers need to get ready for some disruption because new entrants in the payment arena may one day become banks themselves and offer targeted credit based on the information they have acquired.
One of the most important factors sharing the new landscape will be central bank policy. The authors suggest that some e-money providers could be given access to central bank reserves. While this has risks it could also see partnerships that effectively provide "synthetic" central bank digital currencies.
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