Unchained - The IMF on How to Design Central Bank Digital Currencies - Ep.132

Episode Date: August 13, 2019

Dong He, deputy director of the monetary and capital markets department of the IMF, and Yan Liu, Assistant General Counsel at the legal department of the IMF, talk about central bank digital currencies (CBDCs): the current level of interest among central banks in issuing them, what concerns they need to address when designing them, and how commercial banks might be affected, depending on the design of the CBDC. We discuss how privacy could be built into such a currency while also fulfilling anti-money laundering and counter terrorist financial regulations and how a CBDC could affect the IMF's ability to achieve its goal of financial inclusion. Plus, we also cover how crypto assets being widely adopted could influence economies, as well as Facebook's Libra.   Thank you to our sponsors! Crypto.com: https://www.crypto.com/ Kraken: https://www.kraken.com CipherTrace: http://ciphertrace.com/unchained Episode links: IMF: https://www.imf.org/  Dong He: https://www.linkedin.com/in/donghe Yan Liu: https://blogs.imf.org/bloggers/yan-liu/  Speech by IMF managing director Christine Lagarde on the case for new digital currency: https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency  He’s speech on monetary policy in the digital age: https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-monetary-policy-and-cryptocurrencies/he.htm Article on how crypto assets could reduce the demand for central bank money: https://www.imf.org/external/pubs/ft/fandd/2018/06/central-bank-monetary-policy-and-cryptocurrencies/he.pdf   The IMF on Libra: https://www.imf.org/~/media/Files/Publications/FTN063/2019/English/FTNEA2019001.ashx Unconfirmed episode with Michael Casey on why it would be good if Libra rivaled the US dollar: https://unchainedpodcast.com/why-it-would-be-good-if-libra-rivaled-the-us-dollar/ Also check out this Unchained episode from the Oslo Freedom Forum, which dived deeply into the issues around privacy vs. keeping out bad actors: https://unchainedpodcast.com/oslo-freedom-forum-2019-protecting-financial-freedoms-in-the-digital-age/ And this Unchained episode with Alex Gladstein of the Human Rights Foundation, which covered similar issues: https://unchainedpodcast.com/alex-gladstein-of-the-human-rights-foundation-on-the-3-reasons-bitcoin-matters/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, just a quick announcement before we start. You know that crypto weekend retreat I've been promoting for a while now? Well, Melton and Jolik and I are canceling it. You're thinking, what? I've already signed up or I was planning to go and oh my God, she's been promoting it for months now. But yeah, I'm also neck deep in book stuff and have been working weekends and realized I really could use that weekend, especially since I probably will be doing a reporting trip right after. that scheduled retreat. So sorry. Pretty much my whole life is the book and the podcast, and it's going to be like that for a little while longer. That said, we have a great show for you today, so enjoy, and I hope you go and do some yoga anyway.

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. In case you haven't heard, I have another crypto podcast called Unconfirmed. It's shorter, newsier and comes out Fridays. If you haven't taken a listen, go check it out. Also, I publish a newsletter on the top stories in crypto every week. To sign up, go to Unchainedpodcast.com, and you can enter your email address right on the homepage. CipherTrace cutting-edge cryptocurrency intelligence powers anti-money laundering, blockchain analytics, and threat intel. Leading exchanges, virtual currency businesses, banks, and regulators themselves, use CipherTrace to comply with regulation and to monitor.

monitor compliance. Grow your crypto and earn up to 8% per year with crypto.com. It's the place to buy over 40 coins at true cost with no fees and no markups. Download the crypto.com app today. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great fee structure with no minimum or hidden fees. Whether you're looking for a simple fiat on-ramp or futures trading, Cracken is the place for you. My guests for today are Dong He, Deputy Director of the Monetary and Capital Markets Department of the IMF, and Yan Lu, Assistant General Counsel at the Legal Department of the IMF. Welcome, Dong and Yan.

Thank you, Laura. Thank you. Let's start with a basic question. What does the IMF do? Oh, okay. So that's a easy one, I think. The IMF International Monetary Fund is basically a multinational organization. We are member-based organization.

We have 189 members consisting of governments of countries. We promote international financial and monetary stability. So that's basically the function of the IMF. We were funded in 1944, so we are going to celebrate the 75th anniversary this year, actually. as part of the Bretton Woods system. And there's one thing I want to add, which is before the show, Dong and Yan explained to me that the views expressed during this interview are their own and do not necessarily represent the views of the IMF. So if part of the mission of the IMF is to ensure the stability of the international monetary system, how has the advent of blockchain technology and cryptocurrencies affected the IMF's activity? thus far?

Well, you know, this is an exciting time. We are seeing a lot of changes in the technological space. I wouldn't say it has changed our work so far, but, you know, we are interested in understanding what these technologies are, the implications for the financial systems in our number of countries, and eventually how that's going to affect the international monetary landscape. So I think this is just the beginning, and we are still in the learning mode. So we're very interested in the issues that are going to shape the financial systems across the globe.

I just want to add things. Many of our countries, member countries, are very interesting in this issue. And we are obligated, in a sense, to really understand the implications so that we can provide policy advice. technical assistance to our member countries in this area. Yeah, and I actually wanted to ask a little bit more about that, Yen, because the main ways in which the IMF works with the member countries, I believe, is through the central banks. And so before we get even more into blockchain technologies and digital currencies,

can you just explain what the main ways are in which central banks can influence the economies of their countries? I think, well, it's true that our counterparts are central banks. But in terms of our mandate, we look beyond just what central banks do. We also look at our countries, you know, overall economic policies and also their financial sector policies to make sure that, you know, overall the global, international system where, you know, global financial stability will be maintained. So we are engaging with central banks and other entities within the country through our normal surveillance activities, which is usually take the forms of an annual health checkup.

We call it Article 4 consultations. Also, we have other instruments like a financial sector assessment programs. We also provide financing to our country. Through the adjustment programs and our lending, we also engage with central banks and other agencies in the country. And finally, we provide, as I mentioned before, technical assistance to help central banks strengthen their institutional frameworks and also guide them in terms of international best practices and also on the policy matters. So, Laura, I guess your question is also about how central banks affect their own economies, right? That's the question you have.

I see. So basically central banks, the institution, the government institution, in a particular economy, that issues the currency of that country, right? So when we talk about the Federal Reserve, you know, the dollar cash notes we carry around are issued by the Federal Reserve as the Central Bank of the United States. So that's the very basic function of the central bank. Of course, the central bank runs monetary policy, and monetary policy affects the stability of the U.S. dollar as a unit of account.

All the economic activities here in the U.S. are denominated in dollars, and that dollar unit of account is. really defined by the Federal Reserve as the central bank. Does that answer your question? Yeah, yeah. And I also wanted to talk about some of the mechanisms that they use. Like, for instance, commercial banks, as far as I understand, at least in the U.S., are pretty central to the way the Federal Reserve manages the money supply here. And I wanted to know if that was the case for all central banks that, you know, in those countries, commercial banks, also play a key role?

Yes, indeed. So the central bank in all countries are basically the bank of the commercial banks. So we have modern banking systems who have this two-tier structure. The commercial banks provide deposits which are redeemable at par with the central bank liability one-to-one.

And the central bank is at the pinnacle of this pyramid, you could say. So the central bank is the bank of the commercial banks. And, you know, there are various ways for the central bank to use them, either the price or the quantities of money in a particular economy. So that's basically how the system is set up. So let's, and again, you know, the topic for today is central bank digital currencies, but I feel like it's kind of useful to talk about some existing types of money.

So let's talk about cash. for a little bit, what role does cash play in a central bank's ability to manage its economy? So cash is one component of what we call base money of a particular economy. So the base money is the liability of the central bank. It has two components. One is cash. The other one is reserves kept by commercial banks. As I said earlier, commercial banks also issue liabilities in the form of deposits, right?

you and I keep our deposits with commercial banks. And these deposits are part of the broader monetary systems. So these are also money, but these are commercial bank money. It's not central bank money. So central bank money is composed of two components. One is cash, the other one is cash, the other one is commercial bank reserves. And a commercial bank money is in the form of deposits that the public keep with them. and these are redeemable one-to-one.

This commercial bank money is at par with central bank liability. That's the unit of account, basically. One dollar is one dollar. So you can convert your $1 deposit in a commercial bank to a $1 cash provided by the Federal Reserve. So cash is becoming less used kind of broadly. and this is kind of maybe a function of everything becoming more digital. So what is the role for cash or some kind of cash-like form of money in the digital age? Right. That's a very good question.

So globally, we have seen very fast digitization of payments in some economies, but it's not necessarily at the same pace. In some economies, people still use a lot of cash, like in Japan. But in Sweden, you know, cash use has really declined very fast. And looking forward, I think, the digital age, the demand for cash is likely to decline. Now, cash has certain advantages. Let me give you an example. When you buy a cup of coffee in Starbucks, let's say, you can pay with cash.

You just pass a $5 bill to the cashier. And that transaction is very efficient in the sense that it's settled. It's cleared and settled instantaneously. And also there's a feature that the cashier doesn't have to know who you are. He or she doesn't have to know the buyer's Laura Sheen. And you don't have to know who the cashier is. But the other way to pay for coffee is to swipe your credit card. Now, that is a very different payment instrument because for that transaction to be settled,

finally in the sense that for your bank balance to be debited and for the Starbucks account to be credited, it has to be backed by a whole infrastructure. So there are banks involved and it takes some time for that transaction. section to be set up. So there are various ways to make payments. So there are, you know, different features attached to each payment instrument. Now, cash also has a disadvantage. If we are in different places like you are in the, let's say, traveling in Peru, I'm here in the United States. It's very hard for us to give cash to each other to be in the United States. So you have to make payments remotely, and then cash is not very convenient.

Then, you know, bank transfers, credit cards would be much more convenient. So these different instruments have their own features. You could say strengths and weaknesses. Depends on the use of, you know, what sort of transactions we are conducting. So let's talk about central bank digital currency. You know, I've been seeing the IMF has been talking about this and releasing some reports and articles. But let's define that. What do you really mean when you're talking about central bank digital currency?

So central bank digital currency is basically a digital version of central bank liability, which is widely accessible. As I explained earlier, the only widely accessible part of the central bank. central bank money at the moment is cash, right? And, you know, the other part is commercial bank reserves kept by commercial banks. So when we think about creating a central bank digital currency, you and I will be able to hold that central bank money digitally. For example, in our iPhone. So it's more like digital cash.

It's really like digital cash. At the moment, when we think about it. the cash, that's the only way that the public can hold central bank money. So if we have a central bank digital currency, then we can also hold central bank money digital form in addition to or instead of holding cash. So that's one way to think about this. And is that created using blockchain technology or is or can it be created with any other type of technology? It doesn't have to be blockchain technology. I think this idea itself is technology neutral.

So you can have a more centralized way of doing this. For example, the central bank itself is the issuer. So in contrast to Bitcoin, for example, when new coins are mined, it's a decentralized process on the blockchain. Central Bank digital currency doesn't have to be on the decentralized blockchain. It can be issued. Actually, it's probably, at this stage, it makes more sense for the central bank to centrally control the issuance of the central bank digital currency.

And at this point, why is the IMF interested in central bank digital currencies and what level of interest are you seeing from your member countries? That's a very good question because, as I said, the central banks are in charge of maintaining price stability in modern economies. So they are interested, and of course the IMF is also interested in ensuring price stability. So in the digital age, if private digital currencies are developed, if there's less demand, for central bank for central bank currency for example if there

if cash is if cash is no longer used for economic transactions then you know the public will have no interface or no interactions with the central bank the central bank will also have

more difficulty in influencing monetary conditions in the economy in the sense that, particularly in the case that if there are alternative private currencies that are developed in the different unit of account, so that would make the central bank's job of maintaining price stability in the countries much more difficult. So we think that it's important for the central bank to be engaged,

to stay in the game in the digital age, and that would help the central bank achieve their mandate of maintaining price. stability, even in the digital age. Yeah, to answer your second question, several central banks in both advanced and emerging market and developing countries are considering the pros and costs of issuing the CBDC. For instance, Australia, Brazil, China, Denmark, Philippines, just to give you a few examples. And they are really looking very carefully at, you know, whether it makes sense to issue CBTC. So I think this is really a topic that really raised a lot of awareness and also, you know, interest among the membership.

So earlier we talked about how the central bank is kind of the top of the pyramid. It's sort of this lender of last resort. And then they work with the commercial banks to influence the economy. to increase or decrease the monetary supply. So when you introduce a central bank digital currency, how does that process change? You mean, how does the money supply process change? Yeah.

I see. It doesn't alter that mechanism fundamentally. It's just another form of central bank liabilities. So, you know, we are doing research, yes? Well, I thought that there was some thinking that it could potentially sort of reduce the role for commercial banks. And, you know, people could kind of just have accounts directly with the central bank. So in that sense, then... I see.

I see your question. Yes. Yeah, that's a very good question. I think that depends on the design. of the central bank digital currency. And, you know, basically we can talk about two, you know, conceptually speaking, we can talk about two types of central bank digital currency. One is a value-based or token-based.

It's a bit like an object, right, when you like a token. Cash is such a type in the sense that. What matters is the value or authenticity of the dollar bill or the object itself. Another one is in the so-called account-based or claim-based money, like our bank account, our deposits. So if you design the central bank digital currency more like cash, it's like digital cash, then that doesn't affect the demand for deposits as much. On the other hand, if you design the central bank digital currency more like a substitute for commercial bank deposits, that would probably affect how we value commercial bank deposits. So some of us might move our deposits to the central bank.

you feel that is much safer to keep deposits directly with the central bank. But of course, there are different considerations. Why is that whether you pay interest on this deposit? So if there's no interest, then you wouldn't want to give up the interest you earn on a commercial bank deposit. The other thing is that if there's deposit insurance, then you wouldn't worry about. the credit risks, or you wouldn't worry about losing that deposit with the commercial bank. So you don't necessarily forego the interest you earn and move the deposit to the central bank. So these are the options or design features we have to bear in mind when we design the central bank digital currency.

So it's not a uniform impact talking about. And we talked about how there are different designs, et cetera, for the ways these central bank digital currencies might be issued. And I was wondering, are central banks already structured in a way where they can issue central bank digital currencies? Like do existing central bank laws allow for that? Or are there other considerations that need to happen before such currencies? could be issued. Yeah, I think it really depends on whether it is received the central bank's mandate to issue the digital currency and also whether they are allowed to do so under their existing central banking law. So maybe I just take one step back to explain what is a mandate and why it's so important. You know, for a central bank, its mandate is the reason why it exists.

And basically, a central bank is established for certain purposes. and also to discharge certain responsibilities, and its purpose and responsibilities are usually explicitly set forth in the central banking law. And in some countries, as a matter of fact, this could be enshrined in their constitutional law. So central banks are really, in a way, are limited in what they can do based on the specified responsibilities and mandate. And different central banks have different central banking laws, but there are a few general principles which don't already explain. For instance, they can issue currency, right?

They can really set up accounts. But under the existing central banking law, general speaking, the currency, when they meant currency, they're written new banknotes and cash. So the digital currency was not considered at the time when the existing, central banking law was designed. So in many, many countries, we haven't really looked at all the country's central banking law, but I think the general speaking, the central banks do need to amend or modify their central bank laws in order to provide a very clear and certain legal basis for insuring the digital currency. I also want, I read a speech that Christine Lagarde, the, I guess,

I don't know if she's still currently the managing director of the IMF, but she's at least the outgoing, if not former managing director of the IMF. And she talked about how central bank digital currency could help bring about greater financial inclusion. Can you describe how that works? Right. So, for example, at the moment, we still have more than a billion people in the world who are unbanked in the sense that they don't have a bank account. So if you want to have a deposit held with a commercial bank to use that, you know, for payments, you need to be banked.

You need to have an account with the bank. But cash, you know, cash is an instrument that does not require a bank account. So, you know, a lot of the unbanked people in the world, you know, they hold cash. It's very expensive, right? It's also difficult to store. You can easily lose it. It's also very expensive for countries. They have to spend a lot of money maintaining the hygiene of the cash notes,

to replace them once in a while, to distribute them, to secure the storage. So it's a very expensive means. of holding the currency. Now, digital cash will make it much easier for these people to have access to a means of payments. You know, in Africa, a lot of unbanked people, they can keep their cash in a mobile account. And, you know, that's, so it does not necessarily require a bank account.

You can get those digital cash. through the mobile phone companies, through post offices. So that would help these people make economic transactions. Now, in the future, if these services, payment services, can be linked with other type of services through the mobile apps, then they can be incentivized to save, to invest, and that will enhance economic efficiency tremendously. I think that's one way to think about it.

But I think at the same time, we should also bear your mind that this type of virtual currency or digital currencies could raise some financial integrity concerns. So it's quite important to really strike a proper balance, right, between, you know, reaping the benefits, is to support financial inclusion and the need to safeguard the financial integrity to make sure that they would not be abused by the criminals.

I think that's really a very important consideration for policymakers when they're designing the CBDC. You know, one way to think about is that, you know, these days when we, you know, when central banks issue cash, the denominations are not necessarily huge, right? you cannot have a U.S. dollar that's denominated more than $500, let's say. The largest denominations are $100. So one consideration where central banks design the denominations of cash notes

is that they don't want to create too much convenience for illicit use of cash notes. So when you move to the digital world, when you have digital cash, you have to think what is the amount of anonymity that should be allowed in the use of the digital tokens for digital cash. So you need to strike a balance, but there are also ways, technological ways, to track the ways to track the usage of digital cash to ensure that financial integrity is not compromised. So that's another way. So I think, yeah, when I refer to financial integrity, I really mean the money laundering and terrorist financing risks, how to really manage this risks in order to really safeguard the financial system,

while at the same time really allowing more access to the financial services by millions of people. And how do you do that without it being like a totally, surveilled system. How do you manage privacy against those concerns? Yeah, I think that is a very good question. I think that's what Domew is saying that there are no panacea right now,

but I think it's important to really strike this balance and using the technology as Domer saying that, you know, you probably can impose some strict limits on the size of the transaction and you can also use the technology to facilitate effective identity authentication and also tracking of the payments and transfer. This technology can really help either central bank or any all-source entities

to ensure that the AML-CSP measures are compliant because that's really the requirements that each institution like central bank need to comply with. But I do think that old this measures, I think they can be helpful, but they really need some further evaluation to really make sure they're effective to address this concerns. We're going to keep discussing this in a moment because actually Christine Lagarde actually wrote or gave a speech where she outlined a scenario like this. So I'll talk about that in a moment. But first,

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Sign up to stay up to date on the privacy-enhanced compliance initiative and receive authoritative crypto-a-mlports quarterly. www.cifertrace.com slash keep crypto clean. Back to my conversation with Yan Lu and Dong He of the IMF. So the speech that I referenced earlier in which Christine Lagarde sort of outlined a scenario in which the concerns of privacy versus, you know, anti-money laundering and terrorist financing could be balanced was she said that central banks could design digital currency in a way where users' identities would be authenticated through customer due diligence procedures. So I'm not sure. and then she in transactions recorded. So I'm not sure exactly what that looks like. So maybe you can describe that in a second, but let me keep going. And then she said, however, identities would not be disclosed to third parties or governments unless required by law. So she had this example where

let's say that somehow credit score companies or, you know, other companies figure out that if you're the kind of person who purchases frozen pizza and beer, then you, you, you know, you maybe are a higher risk, a higher risk borrower or something like that. So she would say, so if you do go to the grocery and purchase a frozen pizza and beer, then the supermarket, the bank and marketers wouldn't have a way of knowing who you were or wouldn't maybe know what you bought. But at the same time, anti-money laundering and terrorist financial controls could run in the background. And then if there was any suspicion about you, or your transaction, then there would be this veil of anonymity that could be lifted.

So can you just describe how that works? Like I, you know, I understand the words that she was using, but it's just like on a detailed level. Like how does, you know, what are all the different actors that need to be set up in place? And what are the processes, you know, to make this possible? Okay. So basically, the financial action task force, which is an international standard setter, they set the laundering and terrorist financing standard for all countries.

I think one key requirement is called customer due diligence, which basically require, for example, the one you're talking about, the commercial banks and other entities that are involved in the transaction with either cash or with credit card, they will basically set up a very robust monitoring system to see some suspicious transaction. In your example, if somebody engaged in a transaction using, for instance, you know, drug proceeds, and if they have a proper system set in place,

they can trace the proceeds used, you know, in this transaction. They have an obligation not only to monitor, that transaction, but also report that suspicious transaction to a relevant authorities. And that authorities will take certain action that may be through further analysis, and they will take further actions to trace the proceeds. And to the extent, you know, the proceeds are really identified as coming from a suspicious source, and they could suspend the transaction that can also, you know, take other action, for instance, impose certain sanctions on the entities like commercial banks.

So this whole sort of the process, you know, in a very simple work, basically saying commercial banks were, you know, the other entities, you need to ask questions. You need to really ask the person who gives you the cash, you know, where the cash comes from. And is that from a legitimate source or is from illegitimate source? and then based on that answer provided by the commercial bank, the authorities can take certain actions. So that's sort of the normal customer diligence requirement. When we talk about cash, it's very difficult to really trace, as don't mention, because of the anonymity. I think when you use the mobile money and you use, for instance, the central bank, you know, digital currency, To the extent you use certain technology like distributed ledger, you're able to record the whole transaction

and you're sort of getting a better understanding of where the money is coming from that really can help you in terms of investigating, monitoring, and also reporting the cases. Having said that, I do think that, as I mentioned before, this technology still need to be evaluated because ultimately we need to know the beneficial owner of the money, meaning the ultimate owner of the money that get into the transaction. And distributed ledger may not necessarily help you really identify the ultimate owner of particular funds or particular, you know, credit, or money. So that's something we still have to look at.

But I do think that technology offers some promises in terms. terms of, you know, facilitating the monitoring, investigation, and reporting by the commercial banks and other entities involved in the transaction. So, Laura, just to supplement what Yang has said, I think in a way technology is going to give us more options to think about these issues or to strike a better balance, because, you know, as cash is completely anonymous, then that creates a lot of business. difficulties for law enforcement. On the other hand, in the digital world, you don't want to be totally transparent either, right?

Privacy is something that we value. So, you know, what Christine Lagarde mentioned is that you don't want to have necessarily customer profiling because if people can tell you, tell that you are buying certain products, you are a type of person, then, you know, the price is the offer, you, the type of products they offer you would be somehow dependent on that type of profile. That's not necessarily ideal. So in the digital age, you don't necessarily want to have everything that's visible, that's transparent.

So we still value privacy. So technology actually offers the potential for us to customize different degrees of privacy, you know, you don't necessarily have to have a centralized database that has everything. You can review your entitlements for certain things. For example, if you walk into a wine store, you just need to prove that you are over 18 years old or 21 years old. And the store still doesn't have to know your name every time when you make a payment. So these are all the technologies that are going to be possible in the digital world. So it's only that as a matter of public policy, we need to strike a balance at which circumstances we want to know who is behind the transaction more than in other types of situations.

So I think technology is really very exciting because it allows us to have this kind of flexibility. I just want to add that under the current AML CFT standard, this flexibility is already provided there because we are applying a risk-based approach. So basically you need to really design the AML CFT measures based on the level of risks. So in a Dome's example, if you go to a store, you just pay $50 to buy wine.

You know, the level of risk is not that high, compared to you use $500,000 to buy a piece of real estate, right? So the standard really allows the countries to tailor their AML CFT measures, like the customer due diligence requirements to the level of risk. So in some situation, you should ask the risk in some, you know, scenarios. You don't really need to ask questions. So I think, you know, combined with the technology and combined with the risk-based approach, I think we should be able to design a very balanced approach that address the issue of privacy and also financial integrity concerns.

And just so I understand from what you were describing earlier, essentially there will be transactions that are more similar to cash that happen digitally, meaning that I could meet somebody and, for whatever reason, this person and I, you know, maybe I send them money or, or they send me money. And then, and that would be very similar to if we met in person and I handed them a $20 bill or they handed me one. But then when you were saying that there would also be customer due diligence, maybe like a transaction or two away from that transaction, I might be interacting with someone where they would know who I am, like a bank or, you know, some other kind of institution. And then so if for whatever reason there was ever suspicion about what I was doing, then you could maybe kind of reconstruct who else I was transacting with for any transactions

where it wasn't with an institution that knows who I am. Is that kind of what you were describing earlier? Yes, very close. I think basically, as you're saying, that if you transact with somebody, for instance, if you transfer $50,000 to your relative in another country, I think that, you know, the bank, depending on their limit, you know, under their policy, they may ask you to fill out of form, right? So they will ask you, what is the purpose of the transfer? And maybe they even ask you where you get the money. So you submit this form to the bank, and the bank, based on their internal control system, they will verify your responses, and to the extent they're satisfied with the accuracy where the sufficiency of your information, they will make the transfer. But to the extent they are not, they may either ask you for more information or they will not really make the transfer.

So that's really sort of the normal procedure for customer due diligence. And let's also now then talk a little bit about the other area of money that has been burgeoning, I guess is the word, which is crypto assets. And, Dong, you wrote a really fascinating article on how crypto assets could one day reduce the demand for central bank money. And the way you started the article, you kind of described some of the general benefits of crypto assets over central bank money. Can you describe what you think those advantages are? So as I mentioned earlier, there are different types of payment instruments, right? You know, cash versus bank deposit. And, you know, depending on the characteristics of this particular payment instrument, the information requirement is very different.

So potentially, cryptocurrencies can make it very efficient for payments to take place in different locations. For example, we have had a lot of pain points in cross-border payments. You know that it's very expensive, it's slow, it's non-transparent. Once you send remittances, you don't know where they are. It's very difficult to trace. So some of the payment services based on cryptocurrencies can make this process very efficient. It takes seconds or minutes for remittances or cross-border payments to happen. Now, at the moment, of course, we know that cryptocurrencies are extremely volatile.

So this is where really the advantage of central bank money has. in the sense that, you know, modern central bank monetary policy is based on the economic science. So central bankers, for example, monetary policy committee members, they make monetary policy by looking at how the economy functions. They look at various shocks that are hitting the economy,

like trade wars, maybe even earthquakes. So they see how the economy might be hit by these shocks and they respond by changing monetary policy stance, like lower interest rate, or if inflationary pressures are going up, they can tighten monetary policy. So you have a forward-looking monetary policy

making that allows central banks to maintain the stability of the unit of account of the currency. And that's, you know, where the cryptocurrencies have not been able to do. they have, you know, the value of these cryptocurrencies fluctuates very widely, and they do not provide the stability that a currency really needs for economic transactions to happen very efficiently. And so that's really important because for modern economies to function properly, We need to have price stability. But on the other hand, as a means of payment, you know, cryptocurrencies have some of the features that are very easy.

They are very connected with the digital lives, particularly of young people, right? You can on social platforms or apps on your phones, you can use these currencies very easily. So that's why I said early in the beginning that, you know, central banks, they need to stay in the game. They also need to make their currencies very easy to use. for, you know, in the digital age, that's, you know, central bank digital currency is one way to make that happen. And another part of the article that I found really interesting was you said that if people adopted crypto assets, that could prompt a shift from credit money to commodity money.

What does that mean exactly? So modern monetary system was banking system. You know, money is created by, um, credit relationships, right? So central bank money is a, for example, cash is a liability of the central bank or commercial bank deposit is a liability of the commercial bank. These are based on claims or credit relationships. Whereas commodity money is not liability of anybody. Gold, for example, is a commodity money. It's not, it's not, it's not, it's not, it's not really serves any monetary function, but, you know, traditionally in the gold, for example,

in the old age, in the gold standard, you know, gold was used as a currency, but it was not the liability of anybody. Now, if you think about what, you know, cryptocurrencies, like Bitcoin, Bitcoin is not the liability of anybody. So that's a type of commodity money, if, you that's, you know, you serve some monetary function. So you could envisage in the future there will be multiple private cryptocurrencies or commodity monies being created and they could be denominated in different unit of accounts. So that's not necessarily a desirable situation because, you know, money is really a very important utility that the government should provide to ensure that the economy's functions very well.

We need to have price stability. So if you have a lot of currencies competing, and also in payment economics, we have the so-called economies of scale. So you may end up with a couple of private cryptocurrencies dominate. the payment landscape, and they behave as a monopolies. So that's not necessarily a very ideal situation. So we need to have a central bank that's the monopoly issue of the legal tender or the fee at currency, and that can maintain price stability, which is really for the benefit of the

whole of the economy. And one other piece of this that I wanted to ask about was you mentioned that if crypto assets become more widely adopted, and the scenario that you just outlined, that could cause central bank money to no longer be the main unit of account. And then you said that that could make central bank monetary policy irrelevant. And a good analogy is dollarization in developing economies. So can you describe what happens there when a developing economy? does undergo dollarization and how you think that would play out if crypto assets became more dominant? So if in a country that's highly dollarized, it's not only that citizens hold a lot of their deposits in dollars, they also denominates their transactions in dollars. So instead of, you know, paying wages or paying wages in local currency or the the prices are quoted in local currency.

If you have a big chunk of the economy, like 30%, that the prices are actually denominated in US dollars. So even if it's not the United States, you would still buy pizza for $2 instead of, let's say, you know, 100 local currency units. Then, of course, then it's very hard for the central bank of that particular country to influence the

inflation level or to ensure price stability of that country because a lot of economic activities are outside the scope of their influence. They are now

denominated in a foreign currency. So you can imagine that if a lot of the economic activities are instead of denominated in the fiat currency, they are denominated in cryptocurrencies, but it's very hard for the public

authority like the central bank to ensure price stability in that economy. So that's really what I meant earlier. And so do you think that that's what governments should try to do to try to kind of, I don't know if prevent is the word, but stall the adoption of crypto assets? like, is there, I'm sure most of my audience probably would love to see more adoption. So I'm just curious, is there something where for the IMF and the different central banks that for them it would be definitely, you know, something that they should try to prevent? So it really depends on the specific country circumstances. You know, I think across the IMF membership, we have seen.

Country authorities reacting differently, right? Some countries have banned the use or development of cryptocurrencies. Others, you know, have legal systems or laws that allow them to be developed, but, you know, you want to have other regulation to ensure, for example, financial integrity is not compromised. You know, they should pay taxes. You know, these are some of the basic requirements. that would ensure, let's say, a level playing field.

I mean, I think the basic premise here is really that a currency, a theater currency that's properly managed, that has monetary policy that's based on economic science, that is really for the best of, for the good of the majority of the population, right? That's something desirable, as I mentioned earlier, that, you know, economies cannot be left alone without monetary policy, because we know that, you know, in the market economy, if you don't have a public authority like the central bank who manages either the price or the quantities of money, then the economies tend to fluctuate a lot. You have financial stability problems, you have business cycle fluctuations that are very large. not necessarily, you know, welfare improving. So the basic premise is really public policy has a

role to play to ensure price stability. So the economy doesn't fluctuate so wildly. Or financial stability is insured. So that's why we need a central bank. And what about for that goal of financial inclusion? Because I know a lot of people in the crypto space are one of their missions with the work that they do is to promote financial inclusion and, you know, they are quite well aware that there's a large segment of the world's population that isn't, that doesn't make a good, they don't make good candidates for customers. Like they're basically not who, you know, the types of people that banks could make money from. And so I know that, for instance, some of the charitable efforts are around giving people direct access to cryptocurrencies, that they can then convert into their local currency.

So in that way, do you see cryptocurrencies helping to achieve some of the IMF's goals around financial inclusion or any of the other ones? In a way, I mean, the reason why we are thinking that central bank digital currency can help financial inclusion is precisely to play. You know, you play that role, right? If we have a digital version of cash that's easily obtainable, not necessarily through a bank because these people are not banked, then that could help foster financial inclusion. But I guess what we're saying is that absolutely we think, you can help with the financial inclusion,

which is a very important mandate for the fund. But at the same time, we do caution. the countries that, you know, when we really design the central bank digital currency, we need also be careful with respect to a couple of issues that don't mention, for example, they have to have legal basis, clear and certain legal basis. They need to have a proper measures put in place to ensure the financial integrity concerns or risks would be mitigated. So I think they kind of go hand in hand. And I also wanted to ask about Libra.

in this regard. This is Facebook's proposed digital currency. Are you seeing that that's spurring any interest among the central banks to issue their own central bank digital currency? Like they see that as competition and, you know, it's making them realize they need to step

up their game? So our acting managing director David Lutton has recently written an article in the Financial Times. And our colleagues have also published a new paper. It's entitled The Rise of Digital Money. So these issues are all being

analyzed here in the fund. I think given really the scale of the proposed cryptocurrency Libra by Facebook and the Libra sort of consortium, this is a whole different ballgame because It's a very large enterprise. You know, Facebook has more than a billion users. So even though it's a, well, yeah, more than two billion. So that's, this is of systemic importance in the sense that it's going to affect how the global payment system works. So we need to ensure that it's properly regulated, the financial risks, are properly managed.

For example, you know, whether these are redeemable at, you know, real time, in real time to the currencies that back the liberal unit. So some of these issues are not, the details are not yet disclosed, but as a matter of principle, you know, regulation should really be in place. to ensure the safety and soundness of this enterprise. But overall, I think this certainly has prompted a lot of interest for the official sector to understand what's going on, but also to respond in terms of the payment system.

How do we ensure that the global payment system will still be able to meet the demand for the digital aid? But do you think that Libra could pose a threat to some of these fiat currencies? Well, for weaker currencies, for example, for economies that still suffer high inflation, I think that danger is more apparent. Whereas for more mature economies where, you know, monetary policy has a lot of credibility or the, you know, price, level price stability is achieved. I don't see necessarily a very, you know, large challenge or threat from Libera.

I think the challenge there is more of financial stability issue in the sense that whether this, whether they are great, you know, suppose it's a very large money market fund and, you know, whether that would distort how the financial, in the sense, works. You know, that's, those are the issues that we, you know, one needs to be, one needs to be concerned about. Also issues with financial integrity, with, with privacy protection, you know, those issues are very much on the agenda. I don't necessarily see the threat in terms of, you know, a new currency that has more credibility, certainly not for countries that, that have price stability already achieved.

And just to go back to that goal of financial inclusion, do you think that Libra could help in that regard? Well, I mean, in a way, I've already answered the question. I think in some respect, when you have a cryptocurrency that can be easily obtained, it can make payments easier for those non-banked citizens. On the other hand, it really depends on the design of the currency, right? If the currency is very volatile, its value fluctuates.

It doesn't provide a stable store of value. You know, then the demand for that particular cryptocurrency will not necessarily high. So we will have to see how the proposed cryptocurrency works. So I don't think you can make a blanket statement whether it helps or, you know, discourages financial inclusion. Yeah, plus we're not sure if it will launch. So all right. Well, this has been such a great discussion. I really enjoy talking with you both.

Where can people learn more about you and the IMF? Oh, you know, the IMF website has, you know, a huge amount of material for people who are interested. in how the IMF works, what is about. The work I do, you know, I am a monetary economist, so I work a lot on central banking issues, on financial stability issues. So I have written papers, and those are posted in various places. So, you know, for those who are interested,

they can always find my papers. Yeah, similarly, I think, for the work that I'm doing, so I basically oversee the legal department's work on AML-CFTFT, and also Fintech. I just took over Fintech. I think as a don't said, you can go to www.imf.org. There, you can really find a lot of, you know, reports and articles, you know, on Syntac issues. All right, great.

Well, thank you both for coming on. on Unchained. Thank you. Thanks so much for joining us today. To learn more about Dong and E.N and the IMF, check out the show notes inside your podcast player. If you're not yet subscribed to my other podcast Unconfirmed, which is shorter and a bit news here, be sure to check that out. Also, find out what I think are the top crypto stories each week by signing up from my newsletter at Unchainedpodcast.com. Unchained is produced by me, Laura Shin, with help from Fractal Recording, Anthony Youen, Daniel Nuss, and Rich Struffolino. Thanks for listening.