Today, on September 29, 2017, Christine Lagarde, IMF’s managing director, made remarks celebrating the Bank of England's 20 years of independence over monetary policy.
Lagarde asks, "How will FinTech change central banking over the next generation?" She acknowledged that it is a query worthy of hours of contemplative thought and touched on three key topics: virtual currency, new models of financial intermediation, and integration of artificial intelligence.
Lagarde also hinted at a future where special drawing right (SDR), the currency IMF uses in-house, might grow as a result of growth in the cryptocurrency space. "The special drawing right, invented a few decades ago, might have a future interesting life if we include a digital dimension and some new technologies with it,” particularly when existing networks are threatened. On the coupling of digital currencies and the SDR, Lagarde stated, "If the two were to come together, the digital acceleration and facilitation and the geopolitical situation, that would be propitious to relying on an alternative basket of currencies," adding that, rather than becoming a substitute for national currencies, "we would need the two together."
She said that, for now, virtual currencies pose little to no challenge to the existing structure of fiat currencies and central banks because of volatility, risk, energy incentives, and a lack of scalability. She also points out that these issues are technological challenges, which in time may be addressed. Drawing a corollary, Lagarde said, "Not so long ago, some experts argued that personal computers would never be adopted, and some people even contended that tablets would be used to carry coffee around. So I think it may not be wise to just altogether dismiss virtual currencies."
Lagarde said that countries with unstable national currencies sometimes adopt the national currencies of other more established nations, like the US dollar. She said, "Some of these economies might see growing use of virtual currencies."
She continued, "IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential."
Lagarde said that, particularly in remote regions, virtual currencies could become more stable and eventually become more popular than fiat currencies. "For instance, they could be issued one-for-one for dollars or a stable basket of currencies," she added. "So, in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money." She contends that the best practice for centralized banks is to continue to create effective monetary policy while maintaining an open mind to "fresh ideas, new demands," and "new technologies as economies and technologies evolve.”
Lagarde said citizens of the future may also prefer virtual currencies due to a lack of settlement risk and minimal clearing delays for cross-border, small-frequency transactions that don't always merit the transaction fees that centralized networks charge.
Lagarde also addressed the instability of privately issued currencies, saying that, should volatility fail to dissipate, citizens may call upon central banks to issue digital tender.
Lagarde points forward, acknowledging the leaps and bounds that AI systems have undergone in recent years. Machines may indeed take a role that is fore-frontal in guiding monetary policies, but Lagarde acknowledges that there are remaining issues of trust, responsibility, and accountability; a minefield for lawyers.
In her portrayal of the future, Lagarde posits that customers might maintain minimum balances to cover payments on electronic wallets while remaining value might be kept in mutual funds or peer-to-peer lending platforms. A future bereft of large bank deposits may force a paradigm shift from fractional reserve banking.
"We go around beating our chests, reminding ourselves that when globalization was up and rising and the story of the day, we forgot a little bit about the fact that it had to benefit all. Let's try not to make the same mistake over again, and as difficult as it is, as jargoning as it sounds, as technical as it certainly is, let us make sure that these new technologies and the way in which they disrupt and transform will actually work for all, and not just for a few," said Lagarde, going back to a future narrative with a portentous tone, "Failing which, in 2050 ... we might be very sorry that we have not reminded ourselves of that imperative."