IMF: Cryptocurrency can add healthy diversity to financial system
IMF head Christine Lagarde says crypto and fiat can work together for a more robust system.
Christine Lagarde, managing director of the International Monetary Fund (IMF), is arguably one of the world's most influential voices on global financial regulation. She has previously argued that cryptocurrencies are here to stay and must therefore be regulated through proactive use of distributed ledger technology.
Now, in a post from 16 April 2018, she is exploring some of the potential benefits of crypto-assets and how they might serve the international financial system.
"A judicious look at crypto-assets should lead us to neither crypto-condemnation nor crypto-euphoria," Lagarde says in a new blog post. "Just as a few technologies that emerged from the dot-com era have transformed our lives, the crypto-assets that survive could have a significant impact on how we save, invest and pay our bills. That is why policymakers should keep an open mind and work toward an even-handed regulatory framework that minimizes risks while allowing the creative process to bear fruit."
Who is Christine Lagarde and the IMF?
The IMF is an international organisation of 189 countries, focused on global monetary cooperation and financial stability. It was created in 1945 to help bring financial peace to the world in the post-war years, and since then has been among the last word on just about any global financial issue.
Christine Lagarde is its director. After a political science, professional synchronised swimming and legal career spanning decades, she joined the French government. In 2007, she became the first woman to hold the post of Finance and Economy Minister in a G-7 country. She later chaired the European Union's economic and finance council, and then in 2011 started heading up international monetary policies when France took its position as the 2011 G-20 president. Five years later, she was re-elected to do it for a second term.
No international monetary policies can be formed without negotiation and input from a range of stakeholders and advisers, but when you get down to individuals, Lagarde is one of the most economically influential names on the planet.
Fast and cheap
It's hard to ignore the practicality of cryptocurrency over existing central bank currencies. Lagarde suggests that if crypto-assets continue being so risky and unstable, there will be inevitable demand for central bank cryptocurrencies.
"Crypto-assets enable fast and inexpensive financial transactions, while offering some of the convenience of cash. Some payment services now make overseas transfers in a matter of hours, not days. If privately issued crypto-assets remain risky and unstable, there may be demand for central banks to provide digital forms of money," she says.
It's increasingly looking like a blend of government and public digital currencies will be the way of the future, largely thanks to the benefits of digitisation that Lagarde mentions. Sources at IBM have said that the world can expect central bank cryptocurrencies "very, very soon." And arguably central bank digital currencies are already here, with the recent arrival of Venezuela's national cryptocurrency, the Petro. But somewhat ironically, the Petro is widely considered to be riskier and less stable than bitcoin.
Cutting out the intermediaries
"The underlying technology of crypto-assets – distributed ledger technology, or DLT – could help financial markets function more efficiently. Self-executing and self-enforcing 'smart contracts' could eliminate the need for some intermediaries. Already, the Australian Securities Exchange has said it plans to use DLT to manage the clearing and settlement of equity transactions," Lagarde says.
"In my view, the fintech revolution will not eliminate the need for trusted intermediaries, such as brokers and bankers," Lagarde says. "There is hope, however, that decentralized applications spurred by crypto-assets will lead to a diversification of the financial landscape, a better balance between centralized and de-centralized service providers, and a financial ecosystem that is more efficient and potentially more robust in resisting threats."
The Australian Securities Exchange isn't the only one using smart contracts to manage transactions. Smart contracts are already commonplace in cryptocurrency, and many peer-to-peer marketplaces use escrow smart contracts and similar to let users safely trade with each other, without the need for any intermediary. These smart contracts are relatively basic and can be programmed with minimal effort, yet still manage to effectively solve a problem that costs eBay and its users millions of dollars a year.
DLT, as Lagarde notes, goes beyond simply saving money by cutting out the middleman. A similar but slightly separate element is trustlessness. In the same way that smart contracts can be programmed to guarantee safe exchanges between two strangers, distributed ledger technology can be mathematically trustworthy. The CEO of Intercontinental Exchange, which owns the New York Stock Exchange among others, has characterised this as a kind of faith in technology and trust in mathematical laws.
"Secure storage of important records is another promising use for DLT. Healthcare companies are studying how to use the technology to maintain confidential medical data while providing access to insurers and other authorized users," Lagarde notes. "In developing economies, such advances can help secure property rights, increase market confidence and promote investment. In Ghana, where property ownership is often the subject of disputes, a DLT-based platform called Bitland promises to help solve the problem by securely recording land sales."
These particular applications are already being widely explored. South Korea's third-largest dental hospital already uses a blockchain-based system for patient records, which allows for more secure handling of patient information, more efficient access when needed and gives patients the ability to monetise their own medical information as desired. Meanwhile, India is exploring the potential of a nationwide "everything on the blockchain" system, whose earlier stages include land rights management, which has been a pressing and almost unsolvable issue for a while.
Challenges and risks
"What are the implications for financial stability? Our preliminary assessment is that, given their still-small footprint and limited links to the rest of the financial system, crypto-assets do not pose an immediate danger. Even so, regulators should remain vigilant," Lagarde says. "Banks and other financial institutions will face challenges to their business models, should there be a large-scale shift away from government-issued currencies toward crypto-assets. Regulators might find it harder to ensure the stability of a more diffuse and decentralized financial system. Central banks might have more trouble acting as the lender of last resort in case of a crisis.
"Understanding the risks that crypto-assets may pose to financial stability is vital if we are to distinguish between real threats and needless fears. That is why we need an even-handed regulatory agenda, one that protects against risks without discouraging innovation.
"Before crypto-assets can transform financial activity in a meaningful and lasting way, they must earn the confidence and support of consumers and authorities. An important initial step will be to reach a consensus within the global regulatory community on the role crypto-assets should play... A clear-eyed approach can help us harness the gains and avoid the pitfalls of the new crypto-assets landscape."
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and NANO