Source: iStock/Bumblee_Dee

After the European Central Bank (ECB), the central bank for the Eurozone, was unwittingly boosting the case for cryptocurrency adoption in March, now it's time for the International Monetary Fund (IMF), a global organization working to foster monetary cooperation and financial stability.

This weekend, the crypto community (re)discovered a blog post post published in February by Ruchir Agarwal, an economist at the IMF, and Signe Krogstrup, an advisor in the Research Department at the Fund. They discuss a possible implementation of a policy which effectively taxes bank deposits instead of letting them accumulate interest. Despite the views of different authors on the IMF blog do not necessarily represent the views of the IMF, some members of the cryptoverse see this post as a possible incentive for people to move away from centrally dominated financial instruments in favor of crypto itself. In either case, heated discussions are still ongoing both on Twitter and Reddit.

The IMF’s proposal

In the post, the authors point out that central banks reduce interest rates, sometimes down to zero, during financial crises to boost growth by incentivizing people to spend money instead of keeping it in banks. However, severe recessions ask for bigger percentage cuts than what is nominally possible - like 3% to 6% cuts when the interest rate is already close to zero - which would make recovery extremely difficult. The article proposes a policy which would let banks implement negative interest rates, effectively charging you for keeping your funds with them, in order to encourage you to spend your funds in other ways, moving them back into circulation.

This, in theory, works best in a cashless society. Cash in itself has zero nominal interest, so the only way banks can charge any interest in this case is by making cash withdrawals inconvenient and costly, like through various fees. But cash that circulates freely through the economy cannot be directly controlled by banks, so to implement negative interest rates, the authors propose a dual monetary base which depreciates over time that they dub cash-dollars and e-dollars (electronic money).

“To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars,” the blog post explains.

This way, you’re incentivized to spend your 100 cash-dollars today instead of keeping it for a year and effectively losing 3 cash-dollars that you owned. Shops and other places would keep different prices for cash-dollars and e-dollars, so you’d pay more with cash due to depreciation, and holding cash would simply become infeasible.

But what does this mean in the long run, and why would you want to hold any cash at all when you know it will depreciate over time?

Crypto offers an alternative

Although the IMF’s proposal would in theory help economies recover, they sound far from attractive to the individual, regardless of their wealth. If you’re charged a negative interest rate for keeping your money in the bank, and also losing money simply by not spending it as soon as you can, you may feel you have no choice.

Popular economist and founder of Bitcoin alpha hedge fund Adamant Capital, Tuur Demeester, points out on Twitter, “Here is the IMF making a case for a direct tax on deposits and cash, in order to force savers to stimulate the economy. Won't work, as savers will instead bid up prices of cash substitutes such as gold, bitcoin, vodka and toyotas.”

Because the way the shrinking happens is not organic, like in the case of gold, but it is a matter of policy which directly hurts savers. https://t.co/ChNy8a61G8 pic.twitter.com/Nfv3PpXurf — Tuur Demeester (@TuurDemeester) April 22, 2019

Another option not mentioned by Demeester but nevertheless popular is real estate, which is widely accepted to hold a general appreciation trend - meaning that, in general, it will become more expensive as time goes on. Still, not everyone can afford to buy a flat which they will sell after a decade and turn a profit. Gold may be a good store of value, but it is still not cash and is not as financially liquid as you would want it to be, so if, at some point, you’re strapped for cash, your gold may prove less useful than expected.

This leaves cryptocurrencies. Designed to act as both a store of value and a cash substitute, you could choose whether you’d like to save your funds until a later date, or spend them as you see fit. Since it is not centrally regulated, you also need not fear negative interest rates or similar policies, while some companies have started offering saving accounts for crypto and 'Staking-as-a-Service' (SaaS) platforms have started to arise. Also, at this stage, volatility is still an important concern for a cryptocurrency user.

Although this is perhaps far from the tipping point towards cryptocurrencies and decentralization, in the eyes of the community, it could serve as an indication of the trend pushing an increasing number of individuals away from systems they deem undemocratic towards those that promise more financial freedom. As Reddit user u/ReelMoney puts it, “This is a glaring example as to why money should be decentralized. No one should ever have a monopoly on money.”