While the role of cryptocurrencies in the evolution of currency remains a valid debate, one of the key concerns, especially for traditional financial institutions, has been the uncertainty associated with how these digital assets will affect the existing fiat monetary system that is under the control of central banks.
Dong He, the International Monetary Fund’s (IMF) Deputy Director of the Monetary and Capital Markets Department (MCM) recently published a report to address the challenges that the central banks have faced since the emergence of digital currencies. In the report, He elaborated his belief that someday when they achieve wider adoption, cryptocurrencies and other crypto assets may reduce the demand for money from the central banks.
“As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micropayments in the new sharing and service-based digital economy,” he wrote.
At the moment, most, if not all, existing cryptocurrencies are plagued by criticisms pertaining to their capacity to be a dependable medium of exchange. Therefore, it is safe to say that, for the time being, digital currencies are too volatile and too risky to pose much a threat to fiat currencies. In addition to this, digital currencies still lack the same degree of trust that is enjoyed by fiat currencies owing to the numerous cases of fraud, security breaches and operational failures that are characteristic of the crypto world.
However, this safe zone may not last too long – crypto assets and currencies are technological innovations and thus, over time, continuous development will certainly improve on some of these pressing issues and eventually make crypto just as appealing as fiat currencies.
Banks Advised to Step Up
A future where crypto assets are just as acceptable as fiat, or even more appealing than central bank money, is very possible and perhaps Mr. He has already seen its inevitability. In fact, he did mention that the only factor keeping crypto assets from rapid adoption is their volatility.
According to the IMF Deputy Director, central banks have the opportunity to effectively adapt with the times by addressing some of the shortcomings of the traditional global banking ecosystem in order to compete well with the emerging and rapidly growing digital currency technology.
“That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions,” he explained. “The best response by central banks is to continue running effective monetary policy while being open to fresh ideas and new demands, as economies evolve.”
The sentiment that crypto will eventually grow to be a formidable opponent in the mainstream financial industry is shared by many including Christine Lagarde, the IMF Chief who during an event in March proposed that regulators should deploy similar technological mechanisms in order to “fight fire with fire.”