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IMF Says Central Bank-Backed Crypto ‘Could Become Reality’

Last Updated March 4, 2021 2:37 PM
Joseph Young
Last Updated March 4, 2021 2:37 PM

In its latest report entitled “Five Facts on Fintech,” the International Monetary Fund (IMF) said that based on its research, countries generally foresee the emergence of crypto assets backed by central banks.

The study, which surveyed central banks, finance ministries, and other government agencies in 189 countries, explicitly stated that central bank-backed crypto assets are likely to emerge due to lowering costs and increasing efficiency.

The IMF | Source: Shutterstock

Could it threaten bitcoin and the rest of the crypto market?

The IMF cited “countering competition from cryptocurrencies” as one of five main reasons behind the potential emergence of central bank-backed crypto assets, indicating that bitcoin and other major crypto assets are seeing an increase in adoption as an alternative to existing assets.

The IMF’s report read :

“The survey reveals wide-ranging views of countries on central bank digital currencies. About 20 percent of respondents said they are exploring the possibility of issuing such currencies. But even then, work is in early stages; only four pilots were reported. The main reasons cited in favor of issuing digital currencies are lowering costs, increasing efficiency of monetary policy implementation, countering competition from cryptocurrencies, ensuring contestability of the payment market, and offering a risk-free payment instrument to the public.”

In its 2018 report entitled “Global Financial Stability Report,” the IMF said that crypto assets have “features that may improve market efficiency” but could also pose risks to global financial stability if it evolves into a major asset class without safeguards.

The report cited security breaches, fraud, and operational failures in the cryptocurrency market as potential risks involved with the asset class.

Hence, while the IMF indicated that crypto assets may improve the global financial system, regulators would need to impose appropriate safeguards to ensure the sector can grow without threatening financial stability.

“The technology behind crypto assets has the potential to make the financial market infrastructure more efficient. However, crypto assets have been afflicted by fraud, security breaches, and operational failures, and have been associated with illicit activities. At present, crypto assets do not appear to pose financial stability risks, but they could do so should their use become more widespread without appropriate safeguards,” the 2018 report read .

The valuation of the crypto market has increased by more than $60 billion in the past month

The rise of central bank-backed crypto assets is unlikely to threaten bitcoin and other decentralized cryptocurrencies because digital assets created by central banks will be structured in a way that a central institution has full control over the asset’s monetary system.

The merit of bitcoin and other decentralized crypto assets come from the fact that no central entity exists that controls the network that operates as a peer-to-peer network. As a result, anyone can send and receive bitcoin in a node-based system.

However, the anticipation of the emergence of central bank-backed cryptocurrencies indicates that governments do consider crypto assets as potential competitors, which could be considered as a sign of rapid adoption and growth for the asset class.

FATF and G20 moving toward regulation

For years, many countries have imposed differing legislation to regulate the crypto market. South Korea, the U.S., and Japan have geared toward creating a regulated environment for crypto-related businesses to operate in while some countries like China and India have virtually banned most operations related to crypto.

The G20 is moving towards efficient crypto regulation with the request of the Financial Action Task Force (FATF), which has encouraged governments to more strictly regulate the crypto exchange market by tightening policies for exchanges.

The expectations of the rise of central bank-backed digital assets and the move of the G20 to regulate the crypto sector over dismissal indicates the asset class is being acknowledged as an emerging asset class.