IMF Offers Three Adjustments Banks Should Make for Future Relevance

Dong He of IMF

Amidst growing acceptance on cryptocurrencies, International Monetary Fund (IMF) Monetary and Capital Markets Department director Dong He shares his analysis on adjustments central banks should make to remain relevant for the future and maintain control on monetary policy.

First, he advised for central banks to strive to make fiat currencies as the better and stabler units of account.

Second, the use of crypto assets must be regulated, lest there brew a greater competition between the two types of currencies than there currently is, with cryptos being favored better for lighter regulation requirements.

Third, banks must continually strive to make fiat currencies a more attractive option as a settlement vehicle.

This is in light of the blatant threat of banks finally losing their grips on monetary policy, especially that cryptocurrencies have, in essence, a more decentralized and possibly fairer system. Not to mention that cryptos are arguably better in terms of speed, divisibility, and anonymity.

“The advantages are especially apparent in cross-border payments, which are costly, cumbersome, and opaque,” expounds Dong He. “New services using distributed ledger technology and crypto assets have slashed the time it takes for cross-border payments to reach their destination from days to seconds by bypassing correspondent banking networks.”

On the other hand, the IMF Monetary and Capital Markets Department deputy director explained that fiat currencies maintain considerable advantages over cryptos. For example, Bitcoin lacks three pivotal functions that fiat systems have, or should have: guarantee against the risk of structural deflation, the tendency to respond to temporary shocks regarding money demand, thus smoothing the business flow, and finally, the potential to become a lender of last resort.

(Photo credits: Dong He)

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