(Yicai Global) Nov. 15 -- Legal tender has natural advantages over private currencies, but central banks still need to ensure the effectiveness of their monetary policies to safeguard legal tender against the threat posed by cryptocurrencies, warned He Dong, deputy director of the monetary and capital markets department at the International Monetary Fund, told Yicai Global in an interview in Washington DC.
Policymakers need to adopt new measures, such as national currency digitization, to address people’s new demands following radical structural changes in national economies, he said.
A private currency is a medium of exchange mutually recognized by parties involved in a trading activity. The use of these currencies is legitimate as long as they are accepted by all parties, but they are not legal tender or fiat currencies and cannot be publicly offered. Crypto-, or virtual currencies, like bitcoin, are private currencies.
Cryptocurrencies emerged as a result of the rise of the digital and sharing economies; they represent a certain type of financial innovation. These services were created recently and have evolved dramatically over the past several years. Their mechanisms still need to be studied, it’s still impossible to predict which will be able to survive, He stressed.
The Chicago Mercantile Exchange announced its plan to launch bitcoin futures by the end of this year last Tuesday. The price of the digital currency soared to over USD7,000 for the first time within two days after the statement, registering almost 10-fold growth over the past 12 months. The total market value of bitcoin has topped USD189 billion, He added.
The IMF believes that legal tender has unique advantages and will not be replaced by any private currency. However, it’s unadvisable to deny the value of non-fiat currencies outright. Considering the rapid development of the sharing economy, we cannot eliminate the possibility of certain platform-offered tokens or virtual currencies being commonly used on specific markets, he said. Needless to say, if an illegal currency is used in fraudulent activities or for money laundering or financing terrorist attacks, it must be subject to regulation by authorities.
Instead of replacing existing fiat currencies, virtual currencies should fulfill complementary roles alongside modern payment systems, He believes. The IMF does not think that currency digitization by central banks or the use of cryptocurrencies will lead to the eclipse of the banking system. Regulatory traditions and approaches vary from country to country, but initial coin offerings must be controlled by financial regulators -- this is the fundamental principle, he stressed. Individual nations can work out their own initial coin offering measures in line with local risk assessment results, he added.