IMF Urges CBDC Caution

Taking a more cautious stand on CBDC and cross-border payments than often heard from international financial institutions, the IMF released a study recommending that policymakers ensure that CBDC or any other form of public digital money is carefully designed and interoperable with existing payment systems. Policymakers are also encouraged to enhance public-private policy coordination and regulate global stablecoins as well as other forms of private digital money. The analysis bases these recommendations on findings that efficient digital money could be broadly adopted for cross-border payment purposes and diversify reserve currencies – a concern Members of Congress have long expressed about the Fed’s reluctance to establish a dollar CBDC. However, the IMF also warns that digital money adoption could increase bank disintermediation, currency substitution, spillover risk, and capital-flow volatility. The study’s quantitative analysis examines the effects of digital-money efficiency on reserve currency holdings and international currency adoption, showing a positive correlation between these variables. The study also employs a modeling scenario of a digital money-induced shock on the potential demand for global financial safety net resources, noting here that a multipolar reserve configuration may require global reserve-currency issuers to expand liquidity backstops.