Banks VS cryptocurrencies. Survival of the fittest

The IMF published an article entitled “Monetary Policy in the Digital Age,” in which Dong He, Deputy Director of the Monetary and Capital Markets Department, discusses whether traditional monetary policy can survive the decentralization of the banking system.

This is not news to anyone

He says that the question of the gradual obsolescence of banking has never seemed more relevant than now. The IMF does not view cryptocurrencies as a threat to itself. But that's it for now.

The article says that central banks should protect themselves from cryptocurrencies by pursuing “effective monetary policy.”

There are three things that Bitcoin cannot offer that fiat can:

- protection from structural deflation

- the ability to act as a lender of last resort

- “smoothing economic cycles” in case of unexpected events system shocks. 

However, He notes that this should change over time. Bitcoin could become less volatile by gaining the trust of institutional funds, and AI could help smooth out shocks.

Coupled with the inherent benefits of digital money, He says, this means changing financial fundamentals in the future is a very real possibility. He argues that by cutting out intermediaries, cryptocurrencies can return the world to a commodity-based economy, replacing the monetary economy we've become accustomed to. 

One of the more important questions for the IMF now is: Could central banks lose their ability to control the national economy?

He says yes. Central banks structure their policies by setting rates based on the country's monetary reserves, of which they are the monopoly supplier. An economy based on cryptocurrencies will break up these monopolies, and banks may find themselves in a position where they are forced to buy/sell large quantities of cryptocurrencies to regain control of the financial situation.

As an example, he uses the term “dollarization”, referring to the process by which foreign currencies become dominant in emerging economies. During such processes, the policies of central banks cease to correspond to the real economy, and therefore become irrelevant..

What should they do?

He believes that, first of all, central banks should “begin to strive to make fiat currencies a more stable and efficient unit of account.”

Second, he believes, they need to regulate cryptocurrencies to“prevent the possibility of an unfair competitive advantage that cryptocurrencies can gain when there is a shortage regulation.”.

Finally, national banks can try improve their own currencies by making them digital, and perhaps even issue their own tokens. “Such a currency issued by a central bank could be exchanged and used for peer-to-peer transactions in the same way as crypto assets,” writes He.

Christine Lagarde, managing director of the IMF, already expressed similar thoughts last year: “The best response from central banks is to continue to pursue sound monetary policy, while at the same time being open to new ideas and new consumer demands.”

According to financemagnates