Digital Currencies Carry Risks As Well As Rewards, IMF Warns

The push by central banks across the world to develop digital currencies could have some significant downsides as well, warns a new report by the International Monetary Fund (IMF).

As central banks in Europe, China and the United States move closer to rolling out digital cash, the IMF cautions the move could lead to foreign currencies displacing local scripts, Reuters reported.

The adoption of digital currencies could also make it easier to “facilitate illicit flows” while also making it “harder for regulatory authorities to enforce exchange restrictions and capital flow management measures,” the report notes.

Roughly 80 percent of central banks in 66 countries, including 21 advanced nations, are exploring the issuance of digital currencies, while 40 percent have become pilot programs or experiments, including China, which just completed a major trial run.

“Digital money adoption across borders also entails risks and policy challenges,” the IMF report notes, adding it could “raise pressures for currency substitution and worsen vulnerabilities from currency mismatches.”

Overall, a wave of central bank issued digital currencies “could reduce the ability of local authorities to run monetary policy,” the report finds.

Private sector currencies issued by big tech firms, or global stable coins, or GSCs, on various online platforms also carry risks as well for the global financial system.

“GSCs … could affect financial stability as they may suffer from bouts of confidence crisis,” according to the IMF.

While these privately issued currencies, or GSCs, could offer improved financial services, they could also “have a potentially more fundamental impact on global monetary and financial stability,” the report states.

Regulatory and market capabilities around the world, in turn, are lagging behind the technological developments driving the movement towards digital currencies, the report states.

“To extent that it meaningfully increases financial integration without a commensurate development of financial markets and institutions, the issuing countries could have increased exposures to global shocks,” the IMF states.