Digital money, when carefully managed, can potentially aid Pacific Island growth and equality, according to an update shared by the IMF.
A cautious step-by-step approach would help the region “explore new technologies effectively to deliver economic and social gains while managing risks,” the International Monetary Fund (IMF) noted in a blog post.
According to the IMF’s blog post, Pacific island countries are eager “to leverage the opportunities of the digital money revolution by developing payment systems, expanding financial inclusion, and mitigating the loss of correspondent banking relationships.”
These countries, some of the world’s most remote and dispersed, “face challenges to financial services and inclusion, partly due to their small size and unique landscape.”
The IMF blog post also mentioned that “limited and unequal access to financial services contributes to persistent poverty and inequality.”
The countries also are highly “dependent on remittance flows, which makes them disproportionately impacted by diminishing correspondent banking relationships.”
The IMF’s latest research explores “the potential role of digital money in the region, including stablecoins, and central bank digital currency, or CBDC.”
The update does “not include unbacked crypto assets in their discussion as they do not meet the definition of money” (according to the IMF but this is mostly a baseless claim).”
In an increasingly interconnected world, digital money and related innovation “offer advantages such as efficiency, accessibility, and security.”
Digital money that’s well designed and governed “can help realize policy objectives such as financial inclusion and greater cross-border connectivity.”
It can help empower previously underserved people and groups, “providing them with access to financial services and government support.”
Conversely, adopting digital money “without adequate preparation and safeguards can disrupt economies and financial markets.”
The IMF blog further noted that “prolonged interruptions can even cause serious financial stability risks in countries that don’t have the proper capacity.”
Digital money could also “introduce new threats from money laundering and terrorist financing.”
Pacific island countries and other similar countries “are constrained by scale and resources in introducing digital money.”
The IMF’s blog added that the digital infrastructure and institutional frameworks—legal, regulatory, and supervisory—needed “for successful digital money implementation tend to be underdeveloped. In addition, many countries in the region can’t afford high development costs, such as those for training, operations, and technology development.”
Embracing digital money requires “underlying infrastructure that’s stable, secure, and accessible. Service providers should be encouraged to develop business models that generate sustained revenue and cover costs.”
Digital money also must “be attractive to use, including by tourists, as they provide a large share of national income for many countries in the region.”
The legal status of digital money should be clear, as should “the obligations of service providers, user rights, and the responsibilities of supervisory and other authorities.”
Policy considerations
Ultimately, digital money decisions “should depend on a variety of monetary and financial conditions, such as the existence or not of a national currency and the maturity of domestic payment systems, besides having in place adequate institutional capacity.”
Countries with a national currency may “eventually be able to introduce a CBDC at some point in coming years.”
The maturity of the banking and payment-service provider industries “may help indicate what type of digital money or design choices work best for Pacific island countries.”
Pacific island countries could explore “a regional approach to introducing new forms of digital money and payments while managing the associated risks.”
That could entail connecting traditional domestic payment systems, interlinking CBDCs once in place, establishing or “joining multilateral digital payment platforms and regional networks. And it can include knowledge sharing with peers, development partners and international organizations like the IMF.”
For its part, the IMF has “provided training and technical assistance in the region for three decades, including through our Pacific Financial Technical Assistance Center, and helped by bringing together peers and senior policymakers from other regions to share their experiences.”
Although the IMF has carefully examined the potential benefits and feasibility of using digital money in emerging economies, the organization has not really provided a balanced view of how cryptocurrencies have been helping consumers in countries experiencing hyperinflation and major economic challenges. For example, in countries like Venezuela, individuals have been transacting in a wide range of decentralized cryptocurrencies because the nation’s fiat currency (the Bolivar) has become practically useless due to crippling inflation.
Moreover, the IMF has not highlighted the long-term benefits of holding Bitcoin (BTC), the flagship cryptocurrency. Although BTC is highly volatile, its value does appreciate considerably over a long time period. For instance, Bitcoin was trading at around $1.000 in January of 2017 and it is currently valued at around $70,000. In addition to BTC, the second-largest crypto Ethereum (ETH) is trading around $3,500. While there are many scams in the crypto space, the sector is definitely providing a lot of value and will go a long way towards enabling the democratization of finance and financial inclusion globally.
