By Tobias Adrian, Tommaso Mancini-Griffoli Crypto assets have been more of a disappointment than a revolution for many users, and global bodies like the IMF and the Financial Stability Board urge tighter regulation. Some of the rapidly evolving technology behind crypto, however, may ultimately hold greater promise. The private sector keeps innovating and customizing financial services. But the public sector too should leverage technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance, as we noted in a recent working paper: A Multi-Currency Exchange and Contracting Platform. Others too are advancing similar views. Technology has jumped ahead New payment technologies include tokenization, encryption, and programmability: - Tokenization means representing property rights to an asset, such as money, on an electronic ledger—a database held by all market participants, optimized to be widely accessible, synchronized, easily updatable, and tamper-proof. Anonymity of token balances and transactions is not required (and in fact undermines financial integrity).
- Encryption helps decouple compliance checks from transactions so only authorized parties access sensitive information. This facilitates transparency while promoting trust.
- Programmability allows financial contracts to be more easily written and automatically executed, such as with “smart contracts,” without relying on a trusted third party.
Private-sector innovation With these new tools in hand, the private sector is innovating in ways that may be more transformative than the initial wave of crypto assets: tokenization of financial assets, tokenization of money, and automation. The tokenization of stocks, bonds, and other assets may cut trading costs, integrate markets, and enlarge access. But paying for such assets will require money on a compatible ledger. One example is stablecoins, are one example to the extent they comply with regulation. More importantly, banks are testing tokenized checking accounts. And automation is widespread, allowing third parties to program functionality much as developers build smartphone apps. While the private sector pushes the boundaries of innovation and customization, it will not ensure that transactions are safe, efficient, and interoperable, even if well regulated. Rather, the private sector is likely to create client-only networks for trading assets and making payments. Open ledgers may emerge in an attempt to bridge private networks, but are likely to lack standardization and sufficient investment given limited profit potential. And using private forms of money to settle transactions would put counterparties at risk. Central bank role Central bank digital currencies can help because of their dual nature as both a monetary instrument—a store of value and means of payment—but also as infrastructure essential to clear and settle transactions. Policy discussions have mostly focused on the first aspect, but we believe the second should receive just as much attention. As a monetary instrument, CBDC provides safety; it alleviates counterparty risks and provides liquidity in payments. But as infrastructure, CBDC could bring interoperability and efficiency among private networks for digital money and even assets. Payments could be made from one private money to another, through the CBDC ledger or platform. Money could be escrowed on the CBDC platform, then released when certain conditions are met, such as when a tokenized asset is received. And the CBDC platform could offer a basic programming language to ensure smart contracts are trusted and compatible with one another. That too will become a public good in tomorrow’s digital world. Cross-border payments The same vision applies to cross-border payments, although governance gets more complicated (an important topic we leave for another time). A public platform could allow banks and other regulated financial institutions to trade digital representations of domestic central bank reserves across borders, as suggested in our working paper. Participants could trade safe central bank reserves without being formally regulated by each central bank, nor requiring major changes to national payment systems. Again, transactions require more than the movement of funds. Risk-sharing, currency exchange, liquidity management—all are part of the package. Thanks to the single ledger and programmability, currencies could be exchanged simultaneously, so one party does not bear the risk of the other walking away. More generally, risk-sharing contracts can be written, auctions can support thinly traded currency markets, and limits on capital flows (which exist in many countries) can be automated. Importantly, the platform would minimize risks inherent in such contracts. It would ensure that contracts be fully backed with escrowed money, automatically executed to avoid failed trades, and consistent with one another. For instance, a contract to receive a payment tomorrow could be pledged as collateral today, lowering costs of idle funds. Beyond the transfer of value, encryption can help manage the transfer of information. For instance, the platform could check that participants comply with anti-money laundering requirements, but allow them to bid anonymously on the platform for, say, foreign exchange, while still seeing the aggregate balance between bids and asks. Technology can thus support key public policy objectives: - Interoperability among national currencies;
- Safety thanks to escrowed central bank reserves, settlement finality, and automatic contract execution;
- Efficiency from low transaction costs, open participation, contract consistency, and transparency.
Much remains to be explored, and this vision is still taking shape. Crypto was fueled by an attempt to circumvent intermediaries and public oversight. Ironically, its real value may come from the technology that the public sector can leverage to upgrade payments and financial infrastructure for the public good—to inject interoperability, safety, and efficiency into private sector innovation and customization. —This blog is based on joint research work with Federico Grinberg, Robert M. Townsend, and Nicolas Zhang. (Credit: heckepics/iStock by Getty Images) | By Kristalina Georgieva At a time of heightened uncertainties for the global economy, India’s strong performance remains a bright spot. So, it’s fitting that Group of Twenty finance ministers and central bank governors will gather in Bengaluru this week. This will be another challenging year. But it could represent a turning point—with inflation declining and growth bottoming out. Indeed, while our latest projections show global growth slowing to 2.9 percent this year, we anticipate a modest rebound to 3.1 percent in 2024.  Look behind the headline numbers and we see emerging market and developing economies providing much of the momentum. We expect them to account for about four-fifths of global growth this year, with India alone expected to contribute more than 15 percent. But beyond its role as a global growth engine, India is uniquely positioned to bring countries together. In a world facing multiple challenges and rising geopolitical tensions, this leadership is critical—and beautifully captured in the theme of India’s G20 presidency: One Earth, One Family, One Future. Let me share my view of what this spirit of “one” represents for policymakers and for all of us as a global community. First, one family means solidarity and protecting the vulnerable. The reality is that growth is still subpar and price pressures are still too high. And, after three years of shocks, too many economies and people are still hurting badly. Around the world, many households struggle to make ends meet because of the high cost of living. Millions cannot afford fuel for heating or cooking. Successive shocks have increased poverty, jeopardizing decades of progress. And, notwithstanding some easing in food prices, a record 349 million people in 79 countries face acute food insecurity. Supporting the vulnerable is vital in all countries. Fiscal measures should be temporary and laser-focused on protecting those who are most in need—always good practice, but even more important as countries grapple with increasingly limited resources and higher debt. In most countries, targeted measures need to be coupled with gradual fiscal tightening to rebuild buffers and ensure debt sustainability. Meanwhile, bringing inflation back to target remains imperative. To get there, policymakers need to stay the course on monetary tightening. Aligning fiscal and monetary policies will help. Clear communication of these policy goals is vital to avoid a sudden repricing in financial markets. While the global tightening cycle is necessary to ensure price stability, policymakers must be mindful of adverse spillovers to emerging and developing economies—including through a stronger US dollar and capital outflows. While financial conditions have improved since the G20 last met, providing some modest relief, we have seen how higher borrowing costs exacerbate the vulnerability of economies with heavy external debt burdens. About 15 percent of low-income countries are in debt distress and an additional 45 percent are at high risk of debt distress. And among emerging economies, about 25 percent are at high risk and facing “default-like” borrowing spreads. Here, solidarity means better mechanisms to restructure debt. Under the G20’s Common Framework, Chad reached an agreement with its creditors at the end of last year, and Zambia and Ghana are progressing toward debt resolution. But the ground rules need to be clarified and the processes made more efficient and effective. To accelerate debt restructuring efforts, the IMF, World Bank, and India’s G20 presidency are convening a new Global Sovereign Debt Roundtable. This week in Bengaluru, we will meet in‑person for the first time—and pave the way for creditors, both public and private, and debtor countries to work together, assess the existing shortcomings and best ways to tackle them. In this more shock-prone world, some emerging and developing economies will also require additional financial support. So, a well-resourced global financial safety net, with the IMF at its center, is more important than ever. Think of how the Fund has stepped up to support our family of nations since the start of the pandemic. Over $272 billion for 94 countries of which about $34 billion was fast-disbursing emergency financing. The historic SDR allocation of $650 billion to boost our members’ reserves. And a new Food Shock Window provides fast access to resources for countries hit hardest by the food security crisis. Now, further solidarity is needed to stand as one with the low-income and vulnerable members of our family to ensure they can still access concessional IMF financing in times of distress and to guard against future crises. Others with the strength and capacity to do so need to stand up and help address fundraising shortfalls—especially on subsidy resources in the Poverty Reduction and Growth Trust—and deliver additional contributions to the new Resilience and Sustainability Trust. This also means determination to advance the 16th General Review of Quotas so we can complete it by the end of the year. Second, one earth means protecting our planet, our home. We are witness to the increasingly severe and pervasive effects of climate change — an existential threat to humanity that we can only fight as a collective. We must band together as one family in defense of our one earth. Our collective goal of delivering on the Paris Agreement and boosting resilience will require policies that can help redirect trillions of dollars towards green projects. Consider smarter regulation, price signals and well targeted subsidies that incentivize low-carbon investment or financial innovations that mobilize more private capital. Here the IMF’s advice and financial support is working in tandem to mitigate the massive climate-related risks to economic and financial stability. The first wave of pilot countries accessing the Resilience and Sustainability Trust demonstrate how we are helping vulnerable countries set up the right policies and create an environment conducive to climate-friendly investments. Alongside this, we are coordinating with others—including multilateral development banks and the private sector—who have a key role to play in reducing investment risks. To be sure, there are signs of progress, as major economies realign their fiscal frameworks to accelerate the green transition. But policies should stay focused on that transition—rather than providing a competitive advantage to domestic firms. “Green subsidies” for early-stage technologies can be helpful—look at how they lowered the global price of solar energy. They must, however, be carefully designed to avoid wasteful spending or trade tensions, and to make sure that technology is shared with the developing world. In other words, we must not slide into protectionism. This would make it even more difficult for poorer countries to access new technologies and support the green transition. The health of our earth is essential to our future. But it is not the only ingredient. One future means ensuring everyone can prosper. In an era of technological transformation, how policymakers manage the potential of digital progress can be central to a fair and inclusive future. Think of the revenue and compliance gains from digital tax administration; greater transparency through online procurement that helps fight corruption; and the accountability of digital public financial management systems that can strengthen the social contract. India’s Unified Payments Interface is an excellent example of technology boosting financial inclusion. Last month alone, this layer of India’s digital public infrastructure processed over 8 billion transactions. And that system allows 400 million people in rural areas to participate with legacy ‘push-button’ cellphones. This is just the beginning. Most IMF member countries are now actively evaluating central bank digital currencies (CBDCs) that could bring substantial benefits, such as more resilient payments in disaster-prone countries and greater financial inclusion. India has conducted an in-depth assessment of CBDCs, which could inform similar studies elsewhere, accelerating digital progress worldwide. Yet any new financial technology also comes with risks. The recent collapse of some prominent crypto exchanges has intensified concerns about market integrity and user protection. That is why we need the right policies—for example, to strengthen financial regulation and develop global standards that can apply evenly across borders. The IMF’s work on crypto assets is particularly focused on macro-financial policies. The idea of maximizing upsides while avoiding missteps lies at the heart of the IMF’s capacity development work. Our objective is to be a transmission line of best practice across our entire membership. This spirit of “one” should guide us as we move forward. To achieve the goals of ‘One Earth, One Family, One Future’, we need to find common ground even as geopolitical tensions are rising. And we need to steer clear of zero-sum policies that would only leave the world poorer and less secure. As Indian Nobel Laureate Rabindranath Tagore once said: “ You can’t cross the sea merely by standing and staring at the water .” For G20 policymakers, this means having the courage to take the right actions, steering the ship we are all on to safe harbor. |
|
