How to classify digital currency from the perspective of IMF

Summary: IMF's "Money Tree".

Recently, the IMF (International Monetary Fund) published a paper entitled "The Rise of Digital Money".

In this paper, the IMF realized that with the emergence of more and more new digital currencies such as Alipay, Libra, M-Pesa, Paxos, Stabilization, Swish, WeChat Pay, Zelle, WeChat, etc., the impact of digital currency on traditional currencies Even the replacement has become possible.

To this end, in the paper, the IMF provides a conceptual framework to classify new digital currencies in order to explain the implications and identify potential risks, and to provide some policy options for central banks.

The following is the selection of the digital currency classification of the paper:

New digital currency form

Category – "Money Tree"

We compare and contrast different payment methods through a simple conceptual framework. We highlight four attributes of payment methods: type, value, support, and technology. These issues are discussed below and are illustrated in Figure 1.

Because of its dendritic structure, we call it "Money Tree", borrowing the original usage of plant analogy in the economics of economics by Bech and Garratt (2017). (Their "flower of money" is a complement to our framework.)

01

(figure 1)

The first attribute that defines the payment method is the type—Claim or Object.

Claim is an object-based payment method (cash) that is resolved as soon as both parties believe that the object is valid. No exchange of information is required.

Object is transferred based on the existing value elsewhere. This is the case with a debit card. Swipe instructions transfer ownership of a bank's assets from one person to another.

Claims based on Claim simplify transactions, but require complex infrastructure. With the emergence of the Crystal-based system during the Renaissance, merchants can easily carry a letter of credit issued by a bank to exchange goods abroad without carrying heavy and dangerous gold coins in their wallets. Today, most payments are based on Claim. These requirements confirm that the payer is the legal owner of their proposed Claim, identify sufficient funds to support Claim, and require all parties concerned to register the transfer.

The second attribute of the payment method is the value

When classifying claims, the relevant question is whether the value of redemption of claims in currency is fixed or variable.

Fixed value claims are redeemed with a pre-set face value, and face value is expressed in bookkeeping units. For payment, this useful feature allows the parties to the transaction to easily agree on the value of the Climate they exchange in the relevant account unit.

For example, a bank is presented to the bank as a deposit, for example, 10 euros can be converted into a 10-dollar denomination. These claims are similar to debt instruments (which may or may not pay interest) and can be redeemed at face value. Other types of claims can be converted into currency at variable value, ie the market price of the assets supporting the claims. Therefore, such claims are similar to stock instruments, with both upside and downside risks.

These similarities are for illustrative purposes, but do not necessarily mean that the payment method we classify as a class debt or class stock will be recognized in court. When classifying object-based payment methods, the relevant issue is their denomination, either in domestic account units or in their own units. It is worth mentioning that the concept of redemption does not apply to Claim's payment method.

The third attribute of the payment method only applies to fixed value of Claim

The question is whether such redemption guarantees are guaranteed by the government or simply rely on the issuer's prudent business practices and legal framework.

In the latter case, we call backstop "private". This distinction is important because it can affect a user's trust in different forms of money and the reaction of the regulator.

The last attribute is technology

Is the settlement centralized or decentralized? Is the transaction using centralized technology settled between multiple servers through a central proprietary server or a decentralized transaction using decentralized ledgering (DLT) or blockchain technology?

These can be restricted to a small number of trusted ("licensed" networks) or open to the public ("unlicensed"). Decentralized tools can more easily cross national borders.

5 different payment methods

The above features help us distinguish between 5 different payment methods:

(1) Central Bank's currency (CBDC)

(2) cryptocurrency

(3) b-money currently issued by the bank

(4) E-money, an electronic currency provided by the new private sector

(5) i-money issued by private investment funds, which is the abbreviation of investment funds

02

(figure 2)

(1) CBDC

The most recognizable is the currency of the central bank in the form of cash.

(2) cryptocurrency

The cryptocurrency is denominated in its own account unit, created (or "cast") by a non-banking institution, and issued on the blockchain, usually without a license type.

The difference between cryptocurrencies is whether the algorithm created by cryptocurrency attempts to stabilize its value relative to fiat money by issuing more currency when its price is high and exiting circulation when its price is low.

We call these systems "managed coins" (some people also call these "algorithm stable value coins"). However, although the model has been proposed by startups such as Basis, the model has not been extensively tested. In addition, we refer to other cryptocurrencies as “public currencies,” including Bitcoin and Ethereum. (Note: IMF also defines stable currency as blockchain-based electronic money, not cryptocurrency)

(3) b-money

The most widely used debt-based currency is b-money, which usually includes commercial bank deposits. We associate b-money with similar debt instruments that are denominated in account units, and this tool can be redeemed at face value on demand. Transfers are usually made through centralized techniques such as debit cards, wire transfers and checks.

The main feature of b-money is that its redemption guarantee is guaranteed by the government.

(4) Electronic money (e-money)

Electronic money is becoming an important new player in the payments field. The single most important innovation compared to cryptocurrencies is that the claims it issues can be redeemed at face value when needed. Borrowing our previous analogy, it is a debt-like tool. It is like b-money, but its redemption guarantee is not supported by the government. They rely solely on prudent management and legal protection of redeemable assets. Transfers can be concentrated, just like many popular payment solutions in Asia and Africa, including China's Alipay and WeChat Pay, India's Paytm and East Africa's M-Pesa (also known as "storage value facilities").

Please note that banks can also issue electronic money as long as they deal with customers who do not have deposit insurance. Four blockchain-based e-money forms, such as Gemini, Paxos, TrueUSD, dollar coins by Circle and coinbase, are also emerging. These are often referred to as "fiat tokens." The term "stablecoin" is also widely used, although it has a vague definition, including the "managed coins" discussed earlier.

(5) i-Money

Finally, i-money is a potential new payment method, although it may or may not succeed. Therefore, it is a tool similar to stocks.

I-money refers to ownership of assets (usually gold or commodities such as stocks in a portfolio). Examples of gold-backed i-moneys are Digital Swiss Gold (DSG) and Novem.

Private investment funds that provide relatively safe and liquid investments, such as money market funds and exchange-traded funds, are growing rapidly, but have not yet provided a wide range of payment instruments. Especially in the United States, the market-based financial system is larger than the traditional banking system. Private funds have begun to allow customers to pay. However, these mainly rely on mortgages (credit card payments) or subsequent fast and low-cost legal currency redemptions.

However, nowadays, the shares of private investment funds may become i-money. They can be marked, which means they can be represented by any number of coins on the digital ledger . The coin can then be traded directly, at a lower cost, and constitutes a payment denominated in the underlying portfolio, and its portfolio is valued in the value of any currency.

In other words, i-money is stable enough to be used as a wide payment method. However, since the transfer of i-money requires the transfer of ownership of securities, it may be subject to regulatory restrictions, such as restrictions on cross-border transactions.

Libra is a tangible example (IMF classifies Libra as i-money) i-money is backed by a set of assets that have just been announced by members of the Facebook and Libra associations. However, Libra seems to have a portfolio of bank deposit slips and short-term government bonds (called the Libra Reserve) as a backing. Libra's coins can be exchanged into legal tender at any time in exchange for their share of the current value of the underlying portfolio without any price guarantee.

Author: Adrian, Tobias

Compile: Sharing Finance Neo