The rise of electronic money is "not science fiction" and central banks should consider issuing digital currency, the head of the International Monetary Fund (IMF) 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,” said Christine Lagarde, IMF’s managing director, speaking at the Singapore Fintech Festival on Wednesday, where she made an impassioned case for states to step up and take active roles within the changing currency landscape - one that is increasingly reliant on digitalisation rather than physical money.
Ms Lagarde said digital currencies could help achieve public policy goals around financial inclusion, privacy and security, adding that the use of this type of capital would also avoid a situation where “too much power could fall into the hands of a small number of outsized private payment providers”.
Digital currency, also known as electronic money, is intangible, unlike banknotes or coins, but its characteristics are similar to physical currencies in that it can be used to purchase goods and services and transactions can be tracked. Unlike physical currency, however, it can facilitate instant transactions and border-less transfer-of-ownership.
One of the most widely-used forms of digital money is bitcoin, created a decade ago to allow cheap and quick online transactions without the need for a traditional banking intermediary.
Bitcoin gained popularity when its price jumped from $572 in August 2016 to $4,764 in August 2017, according to Statista. The market capitalisation of bitcoin reached $237.6 billion in the fourth quarter of 2017.
“Your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm,” said Ms Lagarde, suggesting that a state-backed token or account held by central banks could be available to people and firms for retail payments.
So far, central banks have not reached a consensus on how to respond to the rise of digital currencies or payments as they grapple with the fact its very existence calls into question their monopoly over the issuance of official currency. However, some banks including the Bank of Canada, Sweden’s Riksbank and the People’s Bank of China are seriously considering issuing digital currency to the public.
Through its ability to reach people and businesses in remote and marginalised regions, digital currency could play a crucial role in achieving the goals of financial inclusion.
Ms Lagarde also suggested central banks could design electronic money in a way that facilitates identity protection and anti-money laundering schemes, and prevents terrorist financing.
Although there are potential downsides to digital currency that could threaten financial stability, Ms Lagarde said, she warned against state-backed banks getting left behind.
"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."