The International Monetary Fund (IMF) has published a new report that outlines the potential effects cryptocurrencies will have on the current financial system and regulatory environment.
Titled The Rise of Digital Money, the report claims that that the two most common forms of money today, cash and deposits, will face tough competition and could even be surpassed by emerging electronic monetary commodities, such as stablecoins.
“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,” the report said. “Increasingly popular forms of e-money are stablecoins. E-money may be more convenient as a means of payment, but questions arise on 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 IMF also said policymakers should be prepared for disruption from big tech companies and FinTech startups. According to the report, banks will feel pressure from e-money, but should be able to respond by offering more attractive services or similar products.
“Today’s new entrants in the payment arena may one day become banks themselves and offer targeted credit based on the information they have acquired,” the report said. “The banking model as such is thus unlikely to disappear.”
Regarding regulation, the report said that central banks will play an “important role” in molding the future of e-money because the rules they set will bear heavily on the adoption of new digital monies.
“One solution is to offer selected new e-money providers access to central bank reserves, though under strict conditions,” the IMF said. “Doing so raises risks, but it also has various advantages. Not least, central banks in some countries could partner with e-money providers to effectively provide ‘central bank digital currency (CBDC)’, a digital version of cash.”
Dave Hodgson, Director and Co-founder of NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, said that the IMF report provides a balanced overview of the current situation, and he agrees with their conclusion that e-money and digital currencies will continue to disrupt other the financial industry.
“Traditional finance, in particular, has become bloated, inefficient and inappropriately costly, and frankly it’s time for a change,” Hodgson said. “I believe that mainstream adoption is imminent of both digital and crypto currencies – we’re already witnessing thousands of young retail consumers selecting challenger banks (largely e-money). This is direct result of improved service offerings, customer service and price points. Several cryptocurrency companies are now starting to cross over into traditional digital money by offering banking (IBAN, Debit card etc) services such as Wirex, Coinbase and Crypterium. It’s also worth noting that in Asia the concept of digital money is well established with services such as Alipay and Wechat.”
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