IMF: Central Bank Digital Currencies could Replace Cash

Central bank digital currencies (CBDCs) have the potential to replace cash, but adoption may take time, said Kristalina Georgieva, managing director of the International Monetary Fund.

"CBDCs can replace money that is expensive to circulate in island economies," she said Wednesday at the Singapore FinTech Festival event, CNBC reported.

"They can offer resilience in more advanced economies. And they can improve financial inclusion where few have bank accounts," she added.

CBDCs are the digital form of a country's fiat currency that is regulated by the country's central bank. They are used through blockchain technology, allowing central banks to direct government payments directly to households.

"CBDCs would offer a safe and cheap alternative to cash. They would also offer a bridge between private money and a yardstick to measure its value, just like cash today that we can withdraw from our banks," the IMF chief also said.

According to the IMF, more than 100 countries are exploring the possibility of CBDCs – or roughly 60% of the world's countries.

"The level of global interest in CBDC is unprecedented. Several central banks have already launched pilot projects or even put CBDC into circulation," the IMF said in a September report.

According to a 2022 survey conducted by the Bank for International Settlements (BIS), of the 86 central banks surveyed, 93% said they were exploring the possibility of CBDCs, while 58% said they were likely to launch their own CBDCs in the short or medium term. But as of June, only 11 countries had adopted a CBDC, with another 53 in advanced stages of planning and 46 exploring the issue, according to Atlantic Council data.

According to BIS, the use of CBDCs for cross-border payments can reduce the cost of receiving, storing and spending foreign currency, depending on design and regulations.

Referring to a 2018 speech by her predecessor Christine Lagarde, when the former IMF chief encouraged policymakers to follow the "winds of change" and explore the use of CBDCs, Kristalina Georgieva said:

"Five years later, I'm here to provide an update on that journey. First, countries have set sail. Many of them are exploring CBDC and developing regulations to guide the development of digital money," Georgieva said, referring to Lagarde's speech.

On Wednesday, the fund released a handbook on CBDC as a reference guide for policymakers around the world. Georgieva said many countries are exploring CBDCs and developing regulations to guide the development of digital money.

"Secondly, we haven't hit dry land yet. There is so much more room for innovation and so much uncertainty about use cases," she said during her speech to an audience that included industry experts, investors and journalists.

"In some countries the case seems unclear today, but even they should remain open to potentially implementing CBDC tomorrow. This is not the time to look back," she pointed out.

"The public sector must continue to prepare for the implementation of CBDC and related payment platforms in the future. Fourth, these platforms must be designed from the ground up to facilitate cross-border payments, including with CBDC," the IMF managing director said.

Georgieva also pointed out that AI "could extend some of the benefits of CBDC" by providing accurate credit scoring and personalized support.

The demand for generative AI has been booming since the launch of the OpenAI company's ChatGPT in November last year.

"This can improve financial inclusion by providing a fast and accurate credit rating based on various data. It can provide personalized support to people with low financial literacy," Georgieva said.

"Certainly we need to protect personal privacy and data security and avoid entrenched biases so that we don't perpetuate inequality but seek to reduce it. Managed wisely, AI can help," she added.

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