IMF published a paper that analyzes regulatory issues arising from the rise of digital money and the impact of digital money adoption on the banking sector. The paper identifies the benefits and risks of digital money and highlights regulatory issues that are likely to emerge with a broader adoption of stablecoins. It also highlights the risks associated with e-money: potential creation of new monopolies; threats to weaker currencies; concerns about consumer protection and financial stability; and the risk of fostering illegal activities, among others. This paper marks the launch of a new IMF series, Fintech Notes. Building on years of IMF staff work, the series will explore pressing topics in the digital economy and the notes will be issued periodically.
The paper first reviews the different models of digital money and offers a simple conceptual framework to compare and contrast them. Next, the paper argues that adoption of certain new models may be extremely rapid. Despite not offering the best store of value, their convenience as means of payment could be unrivaled due to network effects and online integration. The paper then discusses the potential impact of digital money adoption on the banking sector. It considers three scenarios: one in which digital monies are complements, one in which they are substitutes but banks are able to compete effectively for deposits, and one in which banks are transformed into private investment funds following massive deposit outflows. Other risks are also described briefly. Finally, the paper considers how central banks might respond. It discusses the potential benefits of allowing some digital money providers to hold central bank reserves and argues that this could offer an effective model to introduce central bank digital currency (CBDC) to the public at large. The paper concludes that whether CBDC will be the central bank money of the future or whether it will rival bank money remains to be seen and much lies in the hands of central bankers, regulators, and entrepreneurs. However, it is certain that innovation and change are likely to transform the landscape of banking and money.
Related Link: IMF Paper
Keywords: International, Banking, Digital Currencies, Fintech, Stablecoins, Financial Stability, IMF
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