A deputy director of International Monetary Fund’s Monetary and Capital Markets Department has suggested central banks across the world to offer “better” fiat currencies to fend off any potential competition from cryptocurrencies.
Outlining how central banks can forestall the competitive pressure crypto assets may exert on fiat currencies, Dong He says, “First, they should continue to strive to make fiat currencies better and more stable units of account.”
He also quoted IMF Managing Director Christine Lagarde who in a speech last year said, “The best response by central banks is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.”
Lagarde in a blog piece in March had suggested the use of technologies by central banks to “fight fire with fire”.
His suggestion is important in case there is a wider adoption of the cryptocurrencies. In such a scenario, the central banks would lose their control over a large part of the monetary economy.
"Second, government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation," He wrote.
"That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions."
He also suggested that central banks could release their own virtual assets. "For example, they could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are," he added.
The option suggested by He is being brainstormed by many banks. RBI in April said that a group would study the desirability and the feasibility to introduce a central bank digital currency. The report is supposed to be submitted by end-June 2018.
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