A global digital currency might be a future possibility at the International Monetary Fund (IMF). At the Bank of England forum last week, IMF Director Christine Lagarde hinted at the development of a digital currency, similar to the bitcoin, for the organization's special drawing rights (SDR) mechanism to replace existing reserve currencies.

The international finance organization has already begun exploring the possibility with an External Advisory Group discussion last December. Referring to a possible future situation along these lines, Lagarde said that the prospect of a digital currency as a replacement for reserve currencies that are part of the SDR was not "a far-fetched hypothetical." (See also: IMF Urges Banks to Invest in Cryptocurrencies.)

Created in 1969 as a reserve asset, the SDR comprises a basket of currencies including the U.S. dollar and Chinese renminbi. Countries can borrow from the SDR against their official reserves to meet their balance of payments. The importance of the SDR within the international finance system has diminished after the Bretton Woods agreement collapsed and the world moved to a floating exchange rate mechanism. The emergence of alternate financing mechanisms and institutions further undermined the role

An IMFCoin, as several publications have dubbed it, could potentially reinvigorate the SDR's standing in the international finance system. This is because a digital currency would replace the dollar as a reserve currency in international trade transactions. (See also: IMF Chief Lagarde's Comments on Bitcoin Have Big Implications

According to an article in The Wall Street Journal, an IMFCoin would also help prevent volatility in the currency market that occurs due to trade imbalances. An expert on the IMF's External Advisory Group is quoted in the article as saying that a digital currency could "speed" economic growth. This is because it would prevent countries from hoarding physical currency to maintain reserves. Typically, such hoarding leads to contractions in the global economy. Instead, the IMF could digitally increase (or decrease) the number of IMFCoins in circulation based on economic conditions. (See also: Can the IMF Solve Global Economic Problems

But the development of an IMFCoin will take some convincing. According to the WSJ article, certain IMF members such as China may favor the proposal because it would diminish the U.S. dollar's role as a reserve currency. However, the proponents of the move might face resistance from the United States itself, which may be hesitant to give up its currency's privileges. That status enables the United States to achieve several economic ends, from running a current account deficit to enabling low interest rates. For her part, Lagarde has said that the agency needs a "geopolitical situation that is propitious" to make the IMFCoin a reserve currency. (See also: How the U.S. Dollar Became the World's Reserve Currency