IMF warns banks must evolve or be 'left behind' amid the rise of digital money

The International Money Fund (IMF) has warned that banks are at risk of being “left behind” as big tech companies shake up the financial system.

In the paper entitled “The Rise of Digital Money,” IMF authors Tobias Adrian and Tommaso Mancini Griffoli noted that cash and bank deposits, which are currently the most common forms of money, will “face tough competition.”

The paper also cautioned that big tech companies and fintech startups could even surpass them, although banks are “unlikely to disappear” amid the growing threats. It also pointed out the possible disruption that may happen within the banking industry as these new firms offering new payment methods may eventually shift to become banks and utilize their data advantage to provide targeted credit.

Thus, although banks still have some advantages over their tech rivals including the ability to increase deposit interest rates, they should start considering offering better services or similar electronic money products. Also, these new forms of value transfer may offer convenience to consumers, but the stability of their value is still in question.

“Some will be left behind no doubt. Others will evolve, but must do so quickly,” the authors wrote.

With regard to regulation, central banks will play an “important role” in shaping the future of e-money, as they have the power to set standards and a strong influence for their adoption.

“One solution is to offer selected new e-money providers access to central bank reserves, though under strict conditions. Doing so raises risks, but it also has various advantages. Not least, central banks in some countries could partner with e-money providers to effectively provide ‘central bank digital currency (CBDC)’, a digital version of cash.”

However, the paper proposed a different kind of public-private solution, called synthetic CBDC (sCBDC), which would enable central banks to provide settlement services to e-money providers, including access to central bank reserves. All other functions, however, will be the obligation of the private e-money provider under regulation.

The paper noted that the sCBDC is more cost-efficient and less risky and offers room for the private sector to innovate and interact with customers while the central bank provides trust and efficiency into the solution.

Meanwhile, Nick Cowan, CEO of the Gibraltar Stock Exchange Group, said that the idea of digital currency has now been “firmly embedded in the mainstream,” explaining that the growing dissatisfaction with the status quo of traditional finance and related issues fueled the popularity of bitcoin and digital assets.

“As long as these issues are prevalent, the allure of digital currency will be strong,” he said.

Cowan further responded to the risks of financial stability, saying “Here in Gibraltar we are familiar with the merits of a purpose-built Distributed-Ledger-Technology (DLT) regulatory framework. Receiving our DLT licence has enabled the GSX Group of companies to provide our users with the highest standards in digital asset trading, investor protection, and security.”

On the other hand, Dave Hodgson, NEM Ventures Director and Co-Founder, agreed to the IMF report and called for a change in the “bloated, inefficient, and inappropriately costly” traditional financial system.

“I believe that mainstream adoption is imminent of both digital and cryptocurrencies… This is direct result of improved service offerings, customer service and price points,” Hodgson said.

He also said pointed out that there is now an ongoing cross over between cryptocurrency firms and traditional digital money, with companies such as Wirex, Coinbase, and Crypterium now offering banking services like debit cards.