Traditional Money Could Be 'Surpassed' By E-Money, Stablecoins: IMF Paper

A new paper from the International Monetary Fund suggests that cash and bank deposits could be left behind as digital money and fiat-pegged cryptocurrencies see greater adoption.

The Fintech Note, titled "The Rise of Digital Money" and published Monday, looks at how tech firms are increasingly competing with major banks and credit card companies.

"Digital forms of money are increasingly in the wallets of consumers as well as in the minds of policymakers. Cash and bank deposits are battling with so-called e-money, electronically stored monetary value denominated in, and pegged to, a currency like the euro or the dollar."

Ultimately, cash and bank deposits "Will face tough competition and could even be surpassed" by these new forms of value transfer, the paper warns.

Banks should be able to stage a fightback against such payment upstarts, offering better services or similar electronic money products, the note continues, but policymakers are warned that some disruption is likely within the banking industry.

Banks are likely here to stay, as firms offering these new payment methods may move to become banks themselves and use their data advantage to offer targeted credit.

As for regulation, central banks will have an "Important role" in shaping the future of e-money, with the ability to set rules that would have a strong influence on their adoption, and on how much they exert pressure on commercial banks.

"One solution is to offer selected new e-money providers access to central bank reserves, though under strict conditions. Doing so raises risks, but it also has various advantages. Not least, central banks in some countries could partner with e-money providers to effectively provide 'central bank digital currency,' a digital version of cash."

The paper proposes a different public-private solution, dubbed the "Synthetic CBDC", under which a central bank would offer settlement services to e-money providers, including access to central bank reserves.

The sCBDC would be a less costly and less risky model, the paper says, and would still allow the private sector to "Innovate and interact with customers," while the central bank brings "Trust and efficiency" to the mix.