The International Monetary Fund (IMF) has released a discussion note focusing on emerging fintech innovation, distributed ledger technology (DLT), and central bank digital currency (CBDC) among others.

The paper, in particular, lays emphasis on DLT, saying that the technology could spur change in the financial sector. It discusses its application across various sectors including cross-border payments, Know Your Customer (KYC), Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF), and others. In addition, the paper points out that the central banks could leverage the technology for CBDCs:

“A central bank digital currency (CBDC) would not be a parallel currency, but merely a widely available DLT-based representation of fiat money”, it said. “A CBDC might resolve the coordination problem over new virtual currencies, and thus spur technological innovation.”

The authors state that while CBDCs could raise multiple potential costs and risks, they could allow the central bank to retain control of monetary policy effectiveness and boost the adoption and effectiveness of the new, decentralized, service economy by facilitating small value payments. They added that a DLT-based CBDC could also be more secure and resilient than the existing settlement systems which are exposed to the risk of single point of failure. Also, being government sponsored, the trust in the technology and issuance rule would be greater as compared to private digital currencies.

“Finally, privately-sponsored networks for payment services would become more interoperable, and thus more competitive, as they migrate to using the CBDC.”

The paper went on to state: “The introduction and potential proliferation of private virtual currencies might, in one view, threaten to erode the demand for central bank money and the transmission mechanism of monetary policy. A CBDC may forestall such private virtual currencies or relegate them to a secondary role in the payments system.”