If you can’t beat them, join them: IMF to banks on increasing threat from crypto assets

The International Monetary Fund(IMF) has released a publication reflecting on its views regarding the competitive threat that the fast growing cryptocurrency ecosystem is posing to the current banking system. It goes to call upon the adoption of certain aspects of crypto assets into the banking framework. Deputy Director of the IMF, Dong He, published an article titled, “Crypto assets may one day reduce demand for central bank money.”

He expressed the potential threat to fiat money from crypto assets. Fiat money could be wiped out and render banks obsolete. In an attempt to combat this competitive pressure, central banks from all over the world must take some measures. Some banks have already started making money more user friendly. Some have introduced their own computerized tokens to supplement physical cash. Bank saves are also allowing peer-to-peer decentralized exchange akin to cryptocurrencies and making adjustments to the present framework for their survival.

Embracing the times

The idea of the wide scale adoption of a centrally administered digital bank currency is already underway with FedCoin likely to become a reality soon. The Bank of England(BOE) too has continued to press forward with research into models for central bank-issued currencies.

The good, the bad and the ugly

Moving to a system where majority of the transactions are in cryptocurrencies has its benefits of limited inflation risk because the supply is capped. Unlike the hyper inflationary nature of the banking system. However, it will also mean that the banks will entirely lose the enormous power that they hold to use monetary policies to regulate the economy as and when needed. They will lose their ability to impact the economy through strategies such as financing cost changes i.e. interest rate changes.

Also, when looking towards a central bank based computerised token, the very idea of financial independence that draws people to the usage of cryptocurrencies gets compromised. For crypto purists, the very idea of a central bank run cryptocurrency is a contradiction in itself.