Christine Lagarde, head of the International Monetary Fund, said that central banks should consider issuing their own cryptocurrencies, in a very wind-themed speech.
“In Singapore, it is often windy.”
The speech was entitled “Winds of Change: The Case for New Digital Currency”, and it was delivered at the Singapore Fintech Festival. The opening words were: “In Singapore, it is often windy. Winds here bring change, and opportunity.”
Lagrarde identified that a key trend in the world today is the diminishing role of the state in terms of guaranteeing its money. Since people began travelling for commerce. People have needed money that would be accepted everywhere ever since they began travelling for commerce on a large scale, more than one thousand years ago. Eventually, states became the guarantor of money.
Digital money undermines this, and indeed the entire banking system. “Data is the new gold”, said Lagarde, and physical cash is on the way out.
She said that with cryptocurrencies, technology is the anchor of trust. But she is “not entirely convinced” that state regulation can be done away with.
“Should central banks issue a new digital form of money?”
Answering this question, she said: “Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.”
Indeed, the IMF is to release a paper examining the domestic implications of a national cryptocurrency, where a coin would be the liability of the state.
Saying that there “may be a role” for the state in this sector, she identified three benefits: financial inclusion, customer protection, and customer privacy.
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Regarding the first, she said: “We know that banks are not exactly rushing to serve poor and rural populations.”
She called security a “David versus Goliath argument,” arguing that physical money was a check on the power of financial institutions. Without it, private payment providing companies would dominate. Such a system would tend towards monopoly, and make the economy too reliant on one pillar. Digital currency could prevent these issues by providing an alternative and back-up, she said.
Regarding privacy, she said that as cash disappears, people need a new way to make anonymous payments: “Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow?”
Interestingly, she said that she does not necessarily think that cryptocurrency will harm financial stability – “the jury is still out”, she said. For example, digital currency could also prevent bank runs.
She concluded by urging the listeners to be unafraid, just like that statue of the girl on Wall Street (which, being made of bronze, does not experience human emotions).
A threat or not a threat?
The function of IMF is to maintain economic stability with loans and advice to central banks. Created in the aftermath of the Second World War, it is based in Washington DC and has 189 member countries.
Lagarde, a French lawyer who has led the organisation since 2011, has been well aware of the significance of cryptocurrency since at least October 2017. In May 2018, the IMF released a report that said that cryptocurrency did not seem to pose a risk to stability, mainly because of the sector’s limited size in real terms, but then in June it released another that said that cryptocurrency could render central banks irrelevant.
Lagarde’s latest speech had a positive tone. This contrasts with a report made by the Financial Stability Board (the G20’s advisory organisation) in October, which classified cryptocurrency as a developing threat.