IMF Studies Distributed Ledger Technology On A Global Level
On Monday, June 20, 2017, the IMF published a 49-page paper entitled Fintech and Financial Services: Initial Considerations. Focusing on cross-border payments, the authors discuss distributed ledger technology (DLT) as well as the shifting role of central banks and regulators.
In total, the IMF’s Staff Discussion Note demonstrates that the organization has an understanding of DLT and remains relevant in the evolving global economy (despite being more than 70 years old). The paper provides a detailed account of the digital economy ecosystem and adequately expresses the regulatory advances needed across the globe.
It begins with a cursory introduction that explains the importance of the IMF as a facilitator of international trade and financial stability. Highlights from the paper are as follows:
“13. As DLT can take different forms, its potential as well as challenges will vary accordingly.”
In the second section, the authors acknowledge the rapid pace of FinTech innovation and describe the potential of DLT. In point 13, they discuss permissionless versus permissioned DLT (also indicating the various management structures that could control private ledgers). Furthermore, the authors mention the upcoming challenges posed by scalability, interoperability, and privacy concerns.
“16. Technological progress can promote the development and adoption of new services especially when targeted at unmet user needs—what this paper calls ‘shortcomings’ of services.”
In the third section, the authors point to market “shortcomings” which result from technology, regulation, and/or market structure. They explain that the dynamics of each segment influence the others. None of these components exist in a silo. Instead, the three feed into one another and influence how each develops.
“22. Emerging technologies could raise financial stability risks.”
In the fourth section, the authors explain that DLT might encourage greater market efficiencies, such as price discovery, but caution that widespread adoption could expose the global economy to a greater risk of cyberattacks.
“32. As new technologies operate seamlessly across borders, international cooperation is essential to ensure effective regulation.”
Surreptitiously pointing out that national standards vary (or, in some cases, do not exist), the authors suggest that countries could work together to establish regulatory norms. National support and multi-lateral “harmonization” may encourage global FinTech adoption. Comparing snail mail to email, the authors ponder whether payment structures could eventually transcend borders in a similar fashion. Remittances are one potential area for growth.
“41. Token-based systems simply involve the transfer of a payments object.”
In the fifth section, the authors consider how DLT could streamline the payment process. Historically comprised by capturing, messaging, settlement, and disbursement, the evolved payment system could make this bureaucratic infrastructure obsolete.
“62. A second avenue exists to leverage DLT for a novel means of payment; central banks could offer their own digital currencies.”
The authors propose that central bank digital currency (CBDC) could operate in parallel with traditional fiat currencies, allowing these institutions to maintain control of monetary policy and supply.
In all, the IMF’s paper shows that DLT has achieved global prominence, but sorely lacks a comprehensive framework that will expedite widespread adoption. The IMF’s managing director, Christine Lagarde, offered a brief commentary on the matter. DLT remains a nascent industry with many actors and institutions searching for guidance. Continued discourse and study will be essential to ensure that the global economy thrives in its next iteration. The good news is that the IMF has taken the first step.