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IMF warns about risks of digital currency to banks, monetary sovereignty
IMF warns that central bank digital currency (CBDC) may lower competitiveness of a currency in its country of origin, risking its sovereignty over stronger, foreign exchange.
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This file photo taken in Washington, DC, on May 1, 2014 shows bitcoin medals. Bitcoin makes its debut on a major exchange on Dec.10, a milestone for the digital currency that has some investors excited but others nervous. (AFP/Karen Bleier)
The International Monetary Fund has warned that central bank digital currency (CBDC) may pose a risk to the banking industry and domestic currency of a particular country, urging central banks to come up with a policy to mitigate excess use.
Tommaso Mancini-Griffoli, who heads IMF’s monetary and capital-markets department, said CBDC would make particular currency become cheaper and easier to hold, including to non-citizens.
When people from other countries trade more often with foreign-digital currency, it reduces the role of their domestic currency in the process.
“There is a big risk of currency substitution. That is where citizens will start to hold a foreign currency in digital form while transacting foreign currency in digital form,” Mancini-Griffoli said on Tuesday during a discussion in a side event of Group of 20’s Third Finance Ministers and Central Bank Governors (FMCBG) Meeting in Bali.
Migration has a higher chance to occur in countries with high inflation and high exchange-rate volatility, as people will desire more stable alternatives to store value, he said, adding some countries that need a lot of time to adjust their policy may also see a similar trend.
“Once currency substitution happens, it’s very hard to go back,” he said.
Read also: More central banks set to explore crypto
