According to a paper by the International Monetary Fund, digital money is rapidly gaining popularity and could eventually replace cash and deposits.
A Fintech Notice published Monday. It titled “The Rise of Digital Money”. It examines how tech companies are becoming a threat to major banks as well as credit card companies. In the introduction, the author writes:
“Digital money is increasingly found in consumers’ wallets as well as policymakers’ minds. So-called emoney is an electronic currency that stores monetary value electronically and can be pegged to a currency such as the euro or dollar.
The paper warned that cash and bank deposits would eventually be “tough competition” and could even be outsold by new forms of value transfer.
Stablecoins, a form of e-money, have gained popularity due to the fact that they are “more convenient as a method of payment”. The author also raises questions about their stability.
It is economically comparable to a private investment trust that guarantees redemptions at face price. 10 euros must be withdrawn if 10 euros are received. This pledge must be honored by the issuer.”
The author states that banks should be able offer better services and similar electronic money products to fight back. The note warns policymakers that disruption is possible within the banking sector. Banks will supposedly remain as these new payment methods are offered by firms. They may also become banks and utilize their data advantage to offer targeted credit.
The paper also discussed different types of new payment mechanisms, including “i-money”, which is an “equivalent of e-money except for one very important feature – it offers currency redemptions at variable values; it is therefore an equity-like instrument.” It even mentions Facebook Libra as an example.
Without any price guarantees, Libra coins can be converted into fiat currency at any moment for their share in the portfolio’s going value. The payment would be made for the Libra–essentially Libra Reserves shares, though it could not be legally claimed).
The central banks will play an “important role” shaping the future e-money. Their ability to establish rules would determine the pace of cryptocurrency’s evolution and adaption. Their regulations will also influence the pressure on commercial banks. According to the paper:
One solution is to allow selected e-money providers to access central bank reserves under certain conditions. While this poses risks, it has many benefits. One of the benefits is that central banks could work with e-money providers in certain countries to provide ‘central bank virtual currency (CBDC),’ which is a digital version or cash.
A different solution to the public-private problem is also proposed in the paper, dubbed “synthetic CBDC (sCBDC)” where a central bank would offer settlement service to e-money providers. These services could include access to reserves of the central bank. However, all other functions would fall under the control of private emoney providers.
Notably, the sCBDC is less expensive and more risky and would allow the private sectors to “innovate” and interact with customers, while the central bank adds trust and efficiency to the mix, according to the paper.
