Christine Lagarde, managing director of the International Monetary fund (IMF) put out an interesting comment recently. At a recent event, Lagarde remarked virtual currencies might just give existing currencies and monetary policy a run for their money. She even speculated that bitcoins and cryptocurrency have as much of a future as internet itself.
Lagarde attempted to draw parallels between personal computers and cryptocurrencies like bitcoin. The IMF director remarked that not long ago, experts scoffed at the concept of personal computers. Some even joked that tablets would serve best as coffee trays. Building on this context, Lagarde advised bankers to embrace disruptive technologies like cryptocurrencies.
Dialogue over Dismissiveness
Calling bitcoins the “next big thing since the internet and computing” themselves are major statements to make. Bitcoin and other cryptocurrencies may not be much of a threat to fiat currencies today. Nevertheless, Lagarde reminded bankers that they must not be dismissive of their disruptive potential. She went on to recommend dialogue and discussion amongst all stakeholders “for economic and financial stability, and the safety of our global payments and financial infrastructure.”
“Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.”
“Reaching across borders will be critical as the focus of regulation widens — from national entities to border-less activities, from your local bank branch to quantum-encrypted global transactions.”
In further remarks, the IMF managing director conceded that bitcoin/cryptocurrencies could take over and dethrone fiat money as an alternative currency. The managing director cited real life instances of entire countries embracing bitcoin over the American dollar in under-performing economies, with rampant hyperinflation, recession etc. She called this ‘dollarization 2.0’. The original Dollarization term refers to aligning a national currency to the US dollar.
“…think of countries with weak institutions and unstable national currencies,” Lagarde said. ”Instead of adopting the currency of another country — such as the U.S. dollar — some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.
“IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008,” she added.
Better Payment Services
Lagarde also touched on how cryptocurrencies could change the lives of a whole lot of people. They’d enable micro transactions across borders, without transaction charges and the hassle of paying with different currencies.
“[…] why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.”
This has been consistently validated over the past few years. Bitcoin has been gaining rapid traction, has become more accessible, and increasingly stable.
Another interesting possible consequence — that of an ‘unbundling of banking services’, was also discussed. This would involve citizens storing a minimal balance for payment services, while investing the rest in mutual funds or peer to peer lending platforms. All these would be backed by big data and other tech that could fuel the industry. Together, this could further revolutionize how the world will handle finance.
Lagarde also suggested that central banks could issue their own cryptocurrencies to serve people in need. They could be prepared when cryptocurrencies come knocking at their doors, since they solve so many problems that fiat money doesn’t.
“[…] Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash — no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender,” Lagarde elaborated.
“So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy”, Lagarde added, “while being open to fresh ideas and new demands, as economies evolve”.
She was also quick to point out the role the IMF, and the finance regulatory community as a whole, have to play in this transition.
“I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change. I believe that we — as individuals and communities — have the capacity to shape a technological and economic future that works for all. We have a responsibility to make this work.”