The International Monetary Fund (IMF) is trailing the debate about digital monies. It is slow to incorporate key new monetary developments into its remit to improve cross-border payments and strengthen the international monetary system. The IMF has been a money innovator in the past, notably with the introduction of the Special Drawing Rights (SDR). But today, for an institution that has money in its name, it is conspicuously absent in its efforts to improve it.
The IMF Annual Meetings, a gathering of the representatives of the member countries of the IMF, on 14-19 October in Washington, D.C., provided an opportunity to catch up. Proceedings did not suggest that the IMF took advantage of this opportunity. The IMF seems out of its depth and uncomfortable talking about digital financial instruments. It stresses the risks but does not seem to see the opportunities. This is in contradiction of the momentum that digital monies, particularly stablecoins, has seen since earlier this year in the IMF’s biggest shareholder, the U.S.
The IMF’s purpose is to promote free trade, deter exchange restrictions, provide financial assistance to countries facing temporary external payment problems, and establish a multilateral payment system. Digital monies can reduce payment frictions. This is critical to support international trade and advance orderly international economic integration and mitigate countries’ vulnerabilities and recourse to external indebtedness. They can make currencies more competitive and attractive to use and, as such, reduce dependence on a very narrow set of currencies toward establishing a multilateral payment system.
Concerns about the use of only few currencies in international transactions have been voiced since at least the inception of the IMF. At the Bretton Woods conference, the objective of a multilateral payment system was understood as follows: “[…] means must be found to increase the international liquidity of all countries, to give them assurance that temporary deficits in their international balances of payments can be met […] as one of the ‘primary objectives of economic policy’ […] so that each country can count on using the proceeds of its exports to any part of the world to pay for imports from any part of the world.”
The IMF has never made much progress towards a multilateral payment system as can be approximated by the narrow range of currencies in central banks’ foreign exchange reserves. But building on Robert Triffin’s critique, it projected a radical vision of progressive monetary reform with the SDR: “The most fundamental deficiency of the present system, and the main danger to future stability, lies in the fact that it leaves the satisfactory development of world monetary liquidity primarily dependent upon an admittingly insufficient supply of new gold and an admittingly dangerous and haphazard expansion in the short-term indebtedness of the key currency countries.”
The SDR, launched in 1969, is an international reserve asset issued by the IMF to supplement central banks’ foreign exchange reserves. SDRs can be used only among IMF members and prescribed holders and can be exchanged on demand against national currencies at the prevailing exchange rate. It was seen as a key vehicle to improve international liquidity and reduce reliance, notably on a narrow range of national currencies. There are about US$940 billion of SDRs outstanding with the largest allocation ever only in 2021. They never took off as intended to become the principal international reserve asset, but SDRs did demonstrate the IMF’s ability to incorporate new monies.
Digital monies, apart from cryptocurrencies—possibly a step too far for the IMF, are not new monies. They are conventional monies issued in a new format and equipped with new functionalities that exhibit properties highly conducive to improving payments by reducing transaction costs, increasing transparency, and addressing advanced use cases. Most risks attributed to digital monies are known and common to all monetary liabilities or par instruments. Additional risks may arise amid the potential size some instruments may assume, but the remedies, similar to all large financial actors, are understood.
Stablecoins may play a special role amid their easier transferability, but tokenised deposits could leverage existing clearing networks among banks and become formidable payment instruments. Tokenized money market fund shares could play an important role amid their high-grade properties for large value transactions. Central bank digital currencies (CBDC) could be used in cross-border payments and help derisk foreign exchange.
Digital monies will not be a panacea, but they have laid the foundations for a new debate on how to improve payments. It is a debate the IMF should lead to ensure member countries undertake needed efforts to adopt digital monies. The IMF has recognized the possible benefits from digital monies. But with the publication of a number of reports and a handbook on CBDC, it has not proactively been involved in supporting an environment to test and possibly adopt new monies.
The IMF acknowledged early the close relationship between its mandate to establish a multilateral payment system and the potential role of digital monies. It acquiesced that it would need to assess the policy implications of digital money for domestic and international economic and financial stability, but it concluded that it will not concentrate on developing, testing, validating, or mainstreaming new technologies. While the IMF would lack resources to assess new technologies, the essence of digital monies is not the technology but how they can recalibrate international monetary relations and change incentives for money usage.
The IMF can adopt a far more proactive stance and seize the opportunity to make digital money a critical gateway toward improving the international monetary system. It could actively participate in orchestrating new settlement channels. It could even consider assuming a fully operational role leveraging on its transactions in SDRs as a neutral platform to promote alternative payments arrangements for smaller currencies.
The IMF remains a formidable and essential institution. Several of the IMF’s main shareholders are very actively pursuing digital monies, including the U.S., China, and EU countries. The IMF will need to demonstrate not only that it can keep up with its membership but also lead it. Digital monies may offer the best chance to foster a multilateral payment system that has remained elusive for decades. The IMF will need to consider putting digital into Monetary Fund.
Featured Author:
Ousmène Jacques Mandeng is a Senior Advisor at Accenture and a Visiting Fellow, at the London School of Economics and Political Science.
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.