The report marks the launch of a new IMF series, Fintech Notes.
Building on years of IMF staff work, it will explore pressing topics in the digital economy and be issued periodically. The series will carry work by IMF staff and will seek to provide insight into the intersection of technology and the global economy.
The Rise of Digital Money analyses how technology companies are stepping up competition to large banks and credit card companies. Digital forms of money are increasingly in the wallets of consumers as well as in the minds of policymakers. Cash and bank deposits are battling with so-called e-money, electronically stored monetary value denominated in, and pegged to, a currency like the euro or the dollar.
This paper identifies the benefits and risks and highlights regulatory issues that are likely to emerge with a broader adoption of stablecoins. The paper also highlights the risks associated with e-money: potential creation of new monopolies; threats to weaker currencies; concerns about consumer protection and financial stability; and the risk of fostering illegal activities, among others.
The report is organized into four parts. The first reviews the different models of digital money and offers a simple conceptual framework to compare and contrast them.
The second part argues that adoption of certain new models may be extremely rapid. Despite not offering the best store of value, their convenience as means of payment could be unrivaled due to network effects and online integration. In short, while the first part offers a taxonomy of change, this part concludes that some changes are here to stay.
The third part discusses the potential impact of digital money adoption on the banking sector. It considers three scenarios: one in which digital monies are complements, one in which they are substitutes but banks are able to compete effectively for deposits, and one in which banks are transformed into private investment funds following massive deposit outflows. Other risks are also described briefly.
The fourth and final part considers how central banks might respond. It discusses the potential benefits of allowing some digital money providers to hold central bank reserves and argues that this could offer an effective model to introduce CBDC to the public at large.
„Though Libra has met with fierce resistance from central banks and supervisory authorities and might never see the light of day, in many other cases tech firms (both start-ups and established big players) have successfully captured bits and pieces of universal banks’ traditional value chain. This trend may only intensify in the coming years. In this environment, European banks remain squeezed.”