Tao Zhang, Deputy Managing Director of the International Monetary Fund (IMF) has made a strong argument for the development of Central Bank Digital Currency (CBDCs). He asserts that as a new asset class they hold tremendous promise, notably for the developing world.
BENEFITS OF DIGITAL CURRENCY EMPHASIZED
Zhang discussed CBDCs in an address given at a conference hosted by the London School of Economics. He pointed to numerous advantages that these currencies can bring to the financial space, particularly by enabling rapid, seamless transfers and providing financial services for the unbanked.
Notably, however, was his recognition that a revolution is underway across the global economy, and that central banks must innovate in order to avoid being rendered obsolete. Specifically, he asserts that CBDCs have the potential to stem the growing popularity of stablecoins, which he stated “may be difficult to regulate and could pose risks to financial stability and monetary policy transmission.”
Zhang was also quick to point to the challenges that may come with the mass adoption of these assets. Most notably, the current global financial space is not designed to accommodate borderless digital currencies. Thus, one or a select few strong CBDCs could come to dominate the world. He referred to this possibility as “dollarization.”
On the one hand, a CBDC used as an international means of exchange could improve the efficiency of cross-border payments, which are currently costly, slow, and opaque. But at the same time, CBDC available across borders could increase the probability of currency substitution (“dollarization”) in countries with high inflation and volatile exchange rates, and therefore reduce the ability of the central bank to conduct an independent monetary policy.
One interesting suggestion was the possibility of banks creating fiat-backed digital currencies,