Having central banks issue digital currency can bring about financial inclusivity and better security and consumer protection, as well as allay privacy concerns, International Monetary Fund managing director Christine Lagarde said at the Singapore Fintech Festival yesterday.
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 or rural areas," said Ms Lagarde.
The state's role in regulating money has been changed by the financial technology revolution.
"The fintech revolution questions... coins and commercial bank deposits, and it questions the role of the state in providing money," she said.
But millennials are also reinventing how economies work and even 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 micropayments.
"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 deteriorates. 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 due diligence checks on customers, 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.
"Financial institutions and start-ups are free to focus on what they do best - client interface, innovation (and) providing new services," 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 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 yesterday's event, Indian 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)."
