The Deputy Managing Director of International Monetary Fund (IMF), Tao Zhang has spoken about both the advantages and disadvantages of a central bank digital currency (CBDC). Zhang spoke about CBDC during his recent keynote speech which he delivered to the London School of Economics.

Zhang pointed out a couple of advantages of CBDC, one of which is its efficiency and lower costs. According to him, the cost of managing cash can be very high in some countries and the access to the payments system may not be available to those in the rural areas and poorer population.

Zhang also touched on the increased financial inclusion which the CBDC could bring. On this, he said CBDC may provide a public digital means of payment for both the banked and unbanked. He added that, CBDCs could also help to stabilize and strengthen the monetary policy.

The IMF official also spoke about how CBDC could help maintain the sovereignty of a nation’s currency. According to Zhang, a state-baked digital currency, which is denominated in the domestic unit of account, may help minimize the adoption of private-own digital currencies. He said the private-own digital currencies may be difficult to regulate, hence pose risks to financial stability and monetary policy transmission.

Zhang flipped to the other side of the coin and outlined some negative impacts that CBDCs could also have on the financial system. He said they could drive customers away from the banks and also strain central bank balance sheets.

According to the official, offering CBDC could be very costly for the central banks and could also pose risks to their reputation. He said their issuance requires the central banks to be active along several steps of the payments value chain. He claims the banks’ reputation could be compromised due to the hacks and other faults that could impede such operations.

Zhang then proposed a potential hybrid solution called a synthetic CBDC (sCBDC), which would involve the collaboration between the central banks and private sector. With this, Zhang said the private sector would issue coins fully backed with central bank reserves, which would be under the oversight of the central bank.

Featured image courteys of Bloomberg.