The International Monetary Fund (IMF) has released a manual intended to guide governments in creating and implementing Central Bank Digital Currencies (CBDCs). The document, divided into five parts, serves as a reference for policymakers around the world.
In the manual, the IMF emphasizes the need for a dynamic approach when exploring CBDCs, taking into account the rapid evolution of the digital environment.
It outlines critical steps, including clearly defining policy objectives, identifying and managing risks, assessing national capacity for experimentation and implementation, and the importance of strategic communication and stakeholder engagement.
The guide introduces the ‘5P methodology’, a model designed to help central banks explore and develop CBDCs. The approach extends from initial research to potential launch, emphasizing the importance of preparation, proof of concept, prototyping, pilot testing and production.
The 5P methodology is based on global experiences and incorporates best practices from various industries.
CBDCs can combat cryptocurrencies
According to the IMF, CBDCs have the potential to transform the transmission of monetary policy, a crucial element for the functioning of an economy, which influences fundamental economic variables such as investment, consumption, inflation and employment.
Some countries see CBDCs as an opportunity to increase the effectiveness of monetary policy, modernize the financial system and reduce the cost of personal money transfers. However, there are also concerns that CBDCs could weaken the transmission of monetary policy.
When made available to the general public, CBDCs could intensify competition for deposit financing, increase banks’ share of wholesale financing, and reduce bank profits.
Furthermore, CBDCs, says the IMF, have the potential to promote financial inclusion and reduce dollarization or ‘cryptocurrency’, i.e. the use of cryptocurrencies.
Next, the IMF states that the impact of de-dollarization or decryption on financial conditions is ambiguous. Therefore, central banks should closely monitor the effects of CBDC issuance on the macroeconomic environment to maintain the desired balance of financial conditions.
Decoding
The concept of ‘decryption’, as highlighted by the IMF, refers to the process of reducing the adoption of cryptocurrencies in favor of a digital currency issued by a central bank.
As all attempts to ban cryptocurrencies around the world have failed, the IMF believes that CBDCs, when introduced, will provide a ‘safer and more efficient’ alternative to traditional payment methods and cryptocurrencies.
In the context of dollarized or euroized economies, or those where cryptocurrencies have become widely accepted, the introduction of CBDCs could encourage greater use of local currencies, especially as a replacement for other forms of digital money denominated in foreign currencies or digital assets.
This shift towards using CBDCs over cryptocurrencies or digital foreign currencies is a central aspect of decryption. By promoting the use of a sovereign digital currency, central banks can exercise greater control and supervision over monetary and financial systems, thereby contributing to economic and financial stability.
The IMF claims that ‘decryption’ through CBDCs could have an ambiguous impact on financial conditions. On the one hand, it can lead to greater monetary stability and reduce the volatility associated with crypto assets. On the other hand, there may be challenges associated with the acceptance and integration of this new digital currency into the existing financial system.
The balance between maintaining the desirable characteristics of cryptocurrencies, such as efficiency and innovation, and overcoming their challenges, such as volatility and regulatory risks, will be crucial in the process.
In short, the decryption highlighted by the IMF represents another important attempt by central banks and monetary authorities to respond to the rapid digitalization of money and the challenges posed by the growing popularity of cryptocurrencies.
The IMF plans to add approximately five chapters to the manual annually, with the aim of adding approximately 20 chapters by 2026. The chapters will be updated periodically to reflect changing perspectives and developments in the field of CBDCs.
Source: Live Coins
Barry Siefert is an accomplished journalist and author at The Nation View. He is known for his expertise in the field of cryptocurrency, and has written extensively on the topic. With a background in finance and economics, Barry has a deep understanding of the underlying technology and market forces that drive the crypto industry.
