IMF Reviews the Pros and Cons of a CBDC

In a recent keynote speech to the London School of Economics, International Monetary Fund (IMF) Deputy Managing Director, Tao Zhang, outlined advantages and disadvantages of a central bank digital currency (CBDC).

Zhang noted that CBDC has a potential of enhancing efficiency and decreasing costs. “In some countries, the cost of managing cash can be very high on account of geography, and access to the payments system may not be available to the unbanked, rural, or poorer population,” he stated in the Feb. 28 speech, which appeared in the internet on March 19.

Zhang reviews other benefits

The IMF director spoke about increased financial inclusion. “CBDC may provide a public digital means of payment without requiring individuals to hold a bank account,” he said.

Zhang also outlined some other benefits of a CBDC, stability and strengthened monetary policy among them.

Additionally, the IMF official stated that a CBDC can be an effective countermeasure against other digital assets:

“A domestically issued digital currency backed by a trusted government, denominated in the domestic unit of account, may help limit the adoption of privately issued currencies (e.g. stablecoins), which may be difficult to regulate and could pose risks to financial stability and monetary policy transmission.”

Drawbacks of CBDCs mentioned by Zhang

Zhang noted that a proposed-CBDC’s structure is important in curbing potential risks.

The director said such an asset can drive consumers away from banks, as well as strain central bank balance sheets.

Zhang also said that the central bank could face risks and expenses incurred by the endeavor. “Offering CBDC could be very costly for central banks, and it could pose risks to their reputations,” he maintained, adding:

“Offering full-fledged CBDC requires central banks to be active along several steps of the payments value chain, potentially including interfacing with customers, building front-end wallets, picking and maintaining technology, monitoring transactions, and being responsible for AML/CFT issues.”

Zhang added that hacks and other faults could hamper such operations, staining the reputation of central banks.

The IMF official presented a possible hybrid solution named synthetic CBDC, or sCBDC. Such an asset would require cooperation between the central bank and private players. “The private sector would issue coins fully backed with central bank reserves, under the supervision of the central bank,” he explained.

CBDCs have made pretty many headlines for a while now. Sweden started testing a CBDC in February, and several other central banks reviewed the possibility to do so, while others displayed a lack of interest.