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June 1, 2018

Dong He, a deputy director for the International Monetary Fund's (IMF) Monetary and Capital Markets Department, has said that central banks around the world should offer “better” fiat currencies in order to compete with their digital counterparts. The suggestion came in an article published on the IMF website on Thursday.

Controversially titled "Crypto assets may one day reduce demand for central bank money", the article argues that state-owned banks should do everything to “stay in the game in a digital, sharing and decentralized service economy.” In particular, He believes that central banks may need to adopt some of the concepts in order to “forestall the competitive pressure … exerted on fiat currencies.”

He’s words echo those of Christine Lagarde - in March, the IMF director said that regulators should use blockchain technology in order to “fight fire with fire.”

Why it is important

  1. Cryptocurrency supporters forecast the complete failure of traditional financial instruments, with a transition to digital assets occuring at some point in the future. The switch to digital currencies eliminate the hyperinflationary nature of the current system. In the opinion of the blocking community, system allows central banks to control the money supply, and therefore have a huge power.
  2. The IMF fears that regulators will lose power if they do not strengthen their positions in the digital money market in time. He suggests that the idea of a complete blockade of cryptocurrency assets be abandoned.

“To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age,” - writes He.

The official added that it is still difficult to predict whether such actions will lead to a large-scale introduction of a centralized cryptocurrency, or if the blockchain will simply optimize and streamline the current monetary system.

Central banks are gradually showing interest in the cryptocurrency market. On May 18, the Bank of England (BoE) published a working paper on the possible risks and financial stability of central bank digital currencies (CBDCs). The paper constructs three models, each with a different set of sectors that have access to the CBDC.

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