IMF Head Foresees The End Of Banking As Bitcoin Surges Above $4400

Authored by Jeffrey Tucker via The Foundation for Economic Education,

In a remarkably frank talk at a Bank of England conference, the Managing Director of the International Monetary Fund has speculated that Bitcoin and cryptocurrency have as much of a future as the Internet itself.

It could displace central banks, conventional banking, and challenge the monopoly of national monies.  

Christine Lagarde–a Paris native who has held her position at the IMF since 2011–says the only substantial problems with existing cryptocurrency are fixable over time.

In the long run, the technology itself can replace national monies, conventional financial intermediation, and even "puts a question mark on the fractional banking model we know today."

In a lecture that chastised her colleagues for failing to embrace the future, she warned that "Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies."

Here are the relevant parts of her paper:

Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.

 

Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.

 

For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.

 

But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.

 

Better value for money?

For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.

 

IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.

 

And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.

 

For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances.

 

So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.

 

Better payment services?

For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.

 

This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.

 

Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.

 

Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.

 

So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside? Offer it tea—and financial liquidity?

 

New models of financial intermediation

This brings us to the second leg of our pod journey—new models of financial intermediation.

 

One possibility is the break-up, or unbundling, of banking services. In the future, we might keep minimal balances for payment services on electronic wallets.

 

The remaining balances may be kept in mutual funds, or invested in peer-to-peer lending platforms with an edge in big data and artificial intelligence for automatic credit scoring.

 

This is a world of six-month product development cycles and constant updates, primarily of software, with a huge premium on simple user-interfaces and trusted security. A world where data is king. A world of many new players without imposing branch offices.

 

Some would argue that this puts a question mark on the fractional banking model we know today, if there are fewer bank deposits and money flows into the economy through new channels.

 

How would monetary policy be set in this context?

Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective?

Comments

Ghost of PartysOver VD Mon, 10/02/2017 - 11:46 Permalink

Exactly!  For all the countries that want to shitcan paper currency and coin this is their way to achieve it.  Next up will be some government agency, either sovereign or international will dictate the rules and if the sheeple don't like it then a kill switch will be activated.  This could easily turn out to be Big Brother on steroids.

In reply to by VD

Scuba Steve DoctorFix Mon, 10/02/2017 - 12:10 Permalink

Dont let them have the GUNS, Dont let them have the GUNS .... be smart people.It all comes down to that, its the only way they have a chance to have total control.Barter and PM's can be alter-economy even if they go crypto BUT if you let them take the GUNS its all over but the shouting. Local clans can control their small barter economies off the books as long they can defend that right.Forget the courts, they went out with the Hoola-Hoop.

In reply to by DoctorFix

MEFOBILLS Cash2Riches Mon, 10/02/2017 - 12:57 Permalink

The power that cryptos possess cannot be denied.Yes it can.Crypto currency is an asset class.  National currencies are traded for crypto with an exchange rate.  Crypto are an escape valve from national currencies, and cryptos have "value" due to imposed scarcity.  Crypto value is largely due to their security (and scarcity) - allowing transactions to avoid taxation, and to move purchasing power around the world outside of "one world government" scrutiny.Asset classes are not money, even if they take on a form of purchasing power.  Money gets its power from the law.  National monies are "good for taxes, and the payment of debts."  Crypto currencies do not have any legal basis, and are not good for taxes.  Good luck getting goods and services priced in a crypto unit.  Money's true nature is law, and cryptos do not have legal sanction - cryptos are an asset class invented by the market.LaGarde is a total dumbass if she doesn't understand that private corporate bank money gets its entire money power by law, by an act that says their "bank money notes" are good for paying all taxes and debts.  Yes, the sovereign rights of the people were usurped when private banking corporations took the money power for themselves. The power of the state will step in and enforce legal contracts denominated in the national private banking unit.  Cryptos are not a legal device.LaGarde is either casting hypnosis, or is fundamentally confused on the nature of money.

In reply to by Cash2Riches

MEFOBILLS tmosley Mon, 10/02/2017 - 14:28 Permalink

Money is not an asset class.  It is a legal device that is used to transact.  It can transact goods and services.  Or, money can be used to buy asset classes.  In the case of crypto, it is bought with money via an exchange rate.  Crypto is PRICED as an asset class - it is not money.  Don't be cofused because crypto has purchasing power.The works of mankind, are what mankind produces, and his product is PRICED.  Prices are denominated in a legal monetary unit.Money is related to goods and services by way of volume of said money.  Too much money chasing after goods and services - inflation.  Too much money chasing after asset classes e.g. crypto, makes crypto price go up.If you store money as savings, it is not an asset.  It is latent demand.  Money serves both as demand in the now (for transactions in the now) and latent demand, which demands from the future. 

In reply to by tmosley

MEFOBILLS tmosley Mon, 10/02/2017 - 14:40 Permalink

Your wrong, and it is fundamental.Take a bill out of your wallet and look at the wording on it.  It says this note is legal tender for all debts public and private.  No amount of hand waving and ad-hominems make reality go away.If you want to move to a libertarian  paradise, where you can invent your own legal tender and pretend it is money, there are plenty of countries in Africa to move to.

In reply to by tmosley

tion MEFOBILLS Mon, 10/02/2017 - 16:58 Permalink

You are making my eyebrow twitch, throwing around words you don't seem to even comprehend the meaning of.  Much of the power of crypto is founded on it's not being a legal device. It can be owned as a matter of right.  If you really want, you're certainly welcome to keep your privilege/obligation 'money' and enjoy your Stockholm syndrome to your heart's content.  Edit: I should frontrun the REEEEEE BITCOIN IS NOT MONEY tards and clarify that bitcoin is not money and I'm not claiming it is.  It is a currency that can be held outside of the privilege/obligation statutory paradigm.

In reply to by MEFOBILLS

Yog Soggoth MEFOBILLS Mon, 10/02/2017 - 18:22 Permalink

So what? You can have a stack of legal tender, and have it devalue while you sleep. The guy with the bitcoin makes a gain even though he was sleeping until noon just like you. Bitcoin is being artificially manipulated to get people to put those FRNs into cyberspace where they can be taken, thus balancing all the debt that was created. You can trade the crypto for another currency, but you would be avoiding the inevitable unless you bought tangible at exactly the right time. In the end the only real money is PMs, even if every country in the world outlawed them. The government can declare land ownership illegal, and you still have your stack awaiting transport to market when that system fails. 

In reply to by MEFOBILLS

HRClinton tmosley Mon, 10/02/2017 - 13:09 Permalink

Never forget, that (((They))) will NEVER EVER relinquish control of their Babylonian Money Magic (aka fiat currency, fiat debt, fiat credit).Not without losing an all-out war against the People.If they have to, they will copy and piggyback the Crypto movement, so that they can eventually roll out their own as the New FRN.It's (((their))) way:  Ignore, Mock/Ridicule, Fight, 'Join'.  Join, to Infiltrate and Take Over.

In reply to by tmosley