The International Monetary Fund (IMF) says collaboration between central banks and crypto technology could create an innovative and efficient monetary ecosystem.
in a new report written by leaders of the Bank for International Settlements (BIS), the IMF says the technology behind digital assets and the public’s trust in central banks could together set the stage for the monetary policy of the future.
“We argue that the monetary system of the future should exploit the new technical capabilities demonstrated by cryptography, but be based on the trust that central banks provide (BIS 2022).
In other words, any legitimate transaction that can be done with crypto can be better done with central bank money. Central bank digital currencies (CBDCs) and other public infrastructure can underpin a rich and diverse monetary ecosystem that supports innovation in the public interest.
According to the IMF, although the technology behind crypto assets is remarkable, the industry has many flaws, such as extreme price volatility and a lack of regulation and scalability. The IMF says central banks can help solve these problems.
“Crypto is neither stable nor efficient. It is a largely unregulated industry and its participants are not accountable to society. Frequent fraud, theft and scams have raised serious concerns about the integrity of the market.
Crypto introduced us to the possibilities of innovation. Yet its most useful elements need to be sanitized. By adopting new technical capabilities [by] Building on a core of trust, central bank money can form the basis of a rich and diverse monetary ecosystem that is scalable and designed in the public interest.
The report cites real estate tokenization and retail purchases as examples of how central banks can use digital assets.
“First, wholesale CBDCs (central bank digital assets) – a superior representation of central bank money for the exclusive use of banks and other trusted institutions – can offer new technical capabilities…
For example, the buyer and seller of a house could agree in advance that the tokenized payment and the tokenized title transfer must be simultaneous…
Second, at the retail level, CBDCs have great potential, along with their first cousins, quick payment systems. Retail CBDCs would function as digital cash available to households and businesses, with services provided by private companies.
Central bank-operated retail rapid payment systems are similar to retail CBDCs in that they provide this common platform while ensuring services are fully connected. Both promise to reduce payment costs and enable financial inclusion.
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Featured image: Shutterstock/art prodigital/Natalia Siiatovskaia