SINGAPORE - Having central banks issue digital currency can bring about financial inclusivity, better security and consumer protection, as well as allay privacy concerns, managing director of the International Monetary Fund Christine Lagarde told an audience at the Singapore Fintech Festival on Wednesday (Nov 14).
By issuing digital currency, governments can also satisfy public policy goals that private companies are less motivated to achieve, she noted, pointing out that countries such as Uruguay, China and Sweden are considering introducing virtual currencies.
"Banks are not exactly rushing to serve poor and rural populations," said Ms Lagarde.
The state's role in regulating money has been changed by the fintech, or financial technology, revolution.
"The fintech revolution questions... coins and commercial deposits, and it questions the role of the state in providing money," she said.
But millennials, with phone in hand, are also reinventing how economies work and money itself.
Digital currencies, she said, are likely to become more convenient to use and integrated with social media. They will be readily available for online and person-to-person use, including making micro-payments.
"And of course, we expect it to be cheap and safe, protected against criminals and prying eyes," she added.
This evolution cannot be ignored. She said if the majority of people in a country adopt digital forms of money, "the infrastructure for cash would deteriorate, leaving those in the periphery behind".
Calling on governments to take the lead, Ms Lagarde said central banks can allay concerns people may have about the rise of cryptocurrencies by issuing their own digital currency. The more commonly traded cryptocurrencies now include bitcoin, ethereum and dogecoin.
Private firms, she worries, may under-invest in security in the nascent days of cryptocurrencies. Trust in digital currencies would be eroded in the event of a private system breakdown.
"Resilience may also suffer. With only a few links in the payment chain, the system may stop working if one of these links breaks. Think about a cyber attack, a glitch, bankruptcy, or a firm's withdrawal from the local market," she added.
Ms Lagarde said that central banks can design digital currencies in which the users' identities are authenticated by customers adhering to due diligence procedures, and by recording the transactions.
"But identities would not be disclosed to third parties or governments unless required by law," she added. The veil of anonymity can be lifted if the authorities suspect money laundering or terrorism financing activities, for instance.
She said central banks do not have to go at it on their own, but can work with private firms to come up with solutions that allow financial innovation to flourish.
"Banks and other financial firms, including start-ups, could manage the digital currency," she said, adding that central banks can then focus on back-end settlement, which is their comparative advantage.
"This is public-private partnership at its best," Ms Lagarde added.
Mr Ravi Menon, managing director of the Monetary Authority of Singapore, said in March this year that the Republic's central bank does not have a compelling argument to issue digital currency as digital payment networks are already conducting electronic transactions here.
During the event on Wednesday, India's Prime Minister Narendra Modi told the same audience that the fintech revolution has benefited the South Asian country as India makes strides in digital banking, biometrics and connectivity.
He said that digital banking through mobile phones has allowed "millions (to)... receive insurance in their (bank) accounts and have access to pension in old age".
"A student can get scholarship (money) directly (transferred) to her account. No longer will she be lost in endless (paperwork)," he added.
The Singapore Fintech Festival at Singapore Expo will end on Friday.