Dong He the deputy director of the IMF’s Monetary and capital markets department says central banks should make fiat currency more attractive to fend off cryptos. In an article titled Monetary Policy in the digital age published yesterday, he addresses a number of factors central banks can utilize to beat competition from cryptocurrencies.
He starts off by pointing out at the global financial crisis and the bailouts that major financial institutions received back in 2008 which renewed skepticism of central banks monopoly on the issuance of currency. This led to the creation of Bitcoin and other cryptocurrencies that offered an alternative to these institutions.
He says crypto assets have the potential to serve as an alternative means of payment and as units of account adding this could reduce the demand for fiat currency issued by central banks.
He suggests three solutions that central banks can use to thwart the competitive pressure cryptocurrencies exert on fiat currency.
First, central banks should strive to make fiat currency better and more stable units of account. He quotes Christine Lagarde the IMF Managing director who while addressing the Bank of England 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.”
Adding that monetary policymaking stands to benefit from technology. Central banks can improve their economic forecasts by use of big data, machine learning, and artificial intelligence.
Secondly, He suggests that governments should regulate the use of cryptocurrencies to prevent regulatory arbitrage and the presence of unfair competitive advantage virtual currencies can derive from lighter regulation. This means applying rigorous measures to prevent money laundering and financing terrorism, strengthening consumer protection and also effectively taxing cryptocurrency transactions.
Thirdly, central banks should strive to continue making their money attractive to users as a settlement vehicle. He suggests that central banks could make their money more attractive by issuing digital tokens of their own which can supplement physical cash and bank reserves.
Do you agree that central banks by making fiat currency more attractive can fend off cryptos? Share your thoughts in the comment section below.