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IMF chief says unbacked cryptos no match for well-designed central bank digital currencies

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IMF chief says unbacked cryptos no match for well-designed central bank digital currencies

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The last year has been rife with activity around cryptocurrencies and digital money. Financial experts and institutions worldwide have been brainstorming the adoption of blockchain technology and the digitisation of money.

Unbacked cryptocurrencies will be no match for prudently designed central bank digital currencies (CBDCs), International Monetary Fund (IMF) Managing Director Kristalina Georgieva has said.
"If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money," she said during a speech at the Atlantic Council in Washington.
"That is clearly the case when compared to unbacked crypto assets that are inherently volatile. And, even the better managed and regulated stable coins may not be quite a match against a stable and well-designed central bank digital currency," Georgieva said.
The last year has been rife with activity around cryptocurrencies and digital money. Financial experts and institutions worldwide have been brainstorming the adoption of blockchain technology and the digitisation of money.
Nations debating transition to digital money
According to IMF estimates, about 100 countries are already deliberating the transition to digital money. A report published by the global financial think-tank mentioned that six nations, including China, Sweden and the Bahamas, have either already deployed CBDC or are at the brink of doing so.
CBDCs in circulation
The Chinese digital renminbi (called e-CNY) already has over 100 million active users carrying out transactions worth billions of yuan. The Sand Dollar, the local CBDC of the Bahamas, has been in circulation for over a year. Riksbank of Sweden has successfully developed a proof of concept and is all set to evaluate the implications of deploying the technology and drafting policies around CBDCs. These countries have also mandated limits on CBDC holdings to ensure that the money from bank deposits does not flow out into CBDCs.
What about India?
India is also in the process of rolling out its own CBDC. In the Budget 2022-23 speech, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would introduce a Digital Rupee in the coming financial year.
'Phase of experimentation'
As noted by the IMF chief, "We have moved beyond conceptual discussions of CBDCs, and we are now in the phase of experimentation. Central banks are rolling up their sleeves and familiarising themselves with the bits and bytes of digital money." As each economy must tackle different macroeconomic issues, the functioning varies significantly across geographies. This is why CBDCs cannot have a" one size fits all" solution, she said.
CBDCs and financial inclusion
CBDCs play a vital role in enhancing financial inclusion in any nation. In many others, it also serves as an alternate payment option or a mode to fall back upon, should other methods fail. The IMF head cautioned central banks and encouraged them to tackle region-specific economic issues through the deployment of CBDCs.
Privacy in focus
The IMF MD also touched upon a critical point--the financial stability and the privacy of users when transacting with CBDC, thus warranting the need for robust designs. Policymakers must get the framework designed correctly to ensure that privacy is not compromised during the adoption of digital currencies. "Central banks are committed to minimising the impact of CBDCs on financial intermediation and credit provision. This is very important for the wheels of the economy to run smoothly," she said in her speech.
Georgieva says balance key
Finally, the IMF head emphasised achieving a fine balance between financial stability, governance policies, and development. The IMF believes that the development and adoption of CBDCs will create new synergies between private players and foster close relationships between them. The arrival of e-wallets, CBDC distribution frameworks, and other transaction features is only a matter of time.
"The history of money is entering a new chapter. Countries are seeking to preserve key aspects of their traditional monetary and financial systems while experimenting with new digital forms of money," Georgieva said.