The IMF’s Answer to A Global Cryptocurrency

As Thomas Harding stood in the sweltering 100-degree heat beating down on his exposed forehead in downtown Phnom Penh, he started to regret not having brought his hat from the hotel, which was now a good 30-minute drive away.

In the oppressive humidity of the Cambodian capital, Harding fished around his cargo shorts pockets to look for some local currency to purchase a knockoff Knicks hat from a streetside vendor.

Finding about 8,000 riels (about US$2), he pointed to the hat he wanted to purchase when the vendor replied to him in Cambodian, gesturing that he wasn’t about to accept Harding’s riels.

 

Another Cambodian man, standing nearby noticed the bewilderment on Harding’s face before adding helpfully in broken English,

“Not good. He wants dollars. Dollars.”

A wave of comprehension swept across Harding’s face as he dived into his pockets once again and fished out two George Washingtons to hand over to a now satisfied Cambodian hat vendor.

In Phnom Penh and developing capitals across the world, the dollar has taken on the role of the gold as the currency franca. Even in countries where foreigners cannot interact using the same language, they can trade using the same currency.

But this reliance on the dollar is not without its pitfalls and limitations.

Which is why as the world commemorates the anniversaries of two key events in the development of the global monetary system, it might be time to re-look whether these institutions are due for tweaking.

The International Monetary Fund

This year commemorates the creation of the International Monetary Fund (IMF) at the Bretton Woods conference 75 years ago. For an international institution to have existed this long is no mean feat.

But it’s not just the IMF which will be celebrating a milestone this year, 50 years ago, the Special Drawing Right (SDR), the IMF’s global reserve asset, was created with the intention of using it as “the principal reserve asset in the international monetary system” — in other words, a pseudo-global currency.

Five decades on and that ambition remains very much unfulfilled.

The SDR is one of the most underused instruments of international cooperation, yet turning the SDR into a true global currency would yield several benefits for the world’s economy as well as monetary system.

 

To be sure, the idea of a global currency is not new.

Long before the Bitcoin whitepaper was even an idea and well prior to the Bretton Woods negotiations, the father of Keynsian economics, John Meynard Keynes suggested the “bancor” as the unit of account of his proposed International Clearing Union.

In the 1960s, under the leadership of the Belgian-American economist Robert Triffin, other proposals emerged to address the growing problems created by the dual dollar-gold system established at Bretton Woods.

As a result of those discussions, the IMF approved the SDR in 1967 and the dual dollar-gold system eventually collapsed in 1971 during the Nixon administration.

Global Goals, Local Ambitions

But the SDR never became the global currency that the IMF had intended it to be.

Although the IMF’s issuance of SDRs resembles the creation of national currency by central banks, it only fulfills some of the functions of money.

SDRs are a reserve asset and a store of value. They also serve as the IMF’s unit of account, but only central banks — mainly in developing countries and to a lesser extent in developed countries, as well as a handful of international institutions use SDRs as a means of exchange to pay each other.

But with the advent of blockchain technology, that could all be set to change.

SDRs have a number of basic advantages over nationally-issued currencies, not least that the IMF can use it as an instrument of international monetary policy in a global economic crisis.

As the financial crisis of 2008 demonstrated, globalization and financialization have created a heady, interconnected web of correlated transactions and dependencies that can have catastrophic consequences often outside the ambit and capability of national governments to resolve in times of financial turmoil.

 

In 2009, following a proposal by the G20 (a grouping of the world’s 20 richest countries), the IMF issued US$250 billion in SDRs to help combat the financial crisis.

Beyond its role as the lifeblood of multilateralism, SDRs could also become the basic instrument to finance IMF programs.

Until now, the IMF has relied mainly on quota or capital increases and borrowing from member countries to fund its various initiatives. But quotas have tended to lag behind global economic growth — the last increase was approved in 2010, but thanks to bureaucratic sluggishness, the U.S. Congress only agreed to the increased quota in 2015.

And loans from member countries to the IMF — its main source of new funds (particularly during crises) are not truly multilateral instruments.

Instead of relying on the largess and fickleness of individual countries, it would perhaps be more prudent to turn the IMF into an institution fully financed and managed with its own global currency — a proposal made several decades ago by Jacques Polak, then the IMF’s leading economist.

One possibility would be to consider the SDRs that countries hold but have not used as deposits at the IMF, which it could then use to finance its lending to other countries.

The IMF could then issue SDRs regularly, the way a country issues bonds.

In the long term, the amount of SDRs issued could reflect the demand for foreign exchange reserves.

Various economist and the IMF itself have estimated the IMF could issue US$200 billion to US$300 billion in SDRs a year — hardly anything by global reserve currency standards but a start nonetheless.

Multilateralism at its Finest

More importantly, an IMF-issued global currency would spread the financial benefits of issuing currency, seigniorage ( profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs) across all countries.

Under the current global monetary system, seigniorage tends to accrue only to issuers of national or regional currencies that are used in international transactions, in particular the dollar and the euro.

 

But more active use of SDRs would make the international monetary system more independent and less subject to the vagaries of U.S. monetary policy.

One of the major challenges facing the global monetary system today is that the policy objectives of the U.S., as the issuer of the world’s main reserve currency are not always in sync with the stability of the global financial system.

And with growing pressure on the independence of the Federal Reserve from an increasingly interventionist White House, there is no guarantee that the Federal Reserve will act in the interest of long term U.S. monetary and economic policy, let along global economic goals.

Any change towards an IMF-led global currency would also not need to happen overnight. Different national and regional currencies could continue to circulate alongside growing SDR reserves and a new IMF “substitution account” could allow central banks to exchange their reserves for SDRs, as proposed by the United States in the 1970s.

Politically, the pari passu conversion of U.S. dependent dollars to an agnostic dollar equivalent with the IMF would be an easier sell as well.

SDRs could then potentially be used in private transactions and to denominate national bonds and perhaps, eventually spreading to global use on a retail level as digital SDRs using blockchain technology.

The idea may not be as far fetched as it sounds.

Cryptocurrencies for A Cryptic World

The current IMF chief, Christine Lagarde has mentioned cryptocurrencies on several occasions and in an interview with CNBC, spoke of how the nascent digital assets are “clearly shaking the system.”

Speaking at the Singapore Fintech Festival, Lagarde even made the case for central banks to consider issuing their own digital currencies — but why not the IMF itself?

One of Lagarde’s key concerns with cryptocurrencies is their decentralized nature and their inability to be regulated by any central authority.

Yet an IMF-issued digital currency would help to alleviate some of the regulatory concerns with cryptocurrencies (money laundering and the facilitation of cross-border criminal activities) from an internationally more palatable standpoint. 

Furthermore, IMF-member countries could manage and secure the blockchain-based IMF-issued cryptocurrency by running the decentralized nodes necessary to secure the blockchain — which would give each IMF member an ownership-interest and stake in the IMF cryptocurrency.

From that perspective, IMF-backed loans and programs could be seen as less dominated by a few powerful and financially rich countries and have the potential to create a truly global currency which every country could potentially have a stake in.

An IMF-issued digital currency has the potential to become the grease which lubricates the global financial system and given that it is more multilateral in nature, could isolate itself (as best as possible) through a series of checks and balances from the more politicized and nationalized interests of other international institutions.

And the issuance of an IMF-led digital currency may not even require the ascent of national governments — instead it could start as a grassroots movement the same way that cryptocurrencies began.

Instead of trying to get national governments to surrender their sovereignty over the issuance of their national currencies (a power which can be easily abused and result in severe economic pain for citizens), citizens of countries around the world could ditch their national currencies for an IMF digital currency.

National governments would in essence have limited power to prevent their citizens from using this new global currency, in particular because of its digital nature.

Whereas before, the technology did not exist to issue a global digital currency, the experience of Bitcoin and other cryptocurrencies have shown just how far this technology has come and what is truly possible.

It’s entirely possible that one day when you’re standing at a roadside stall in Phnom Penh or indeed any other city, the street vendor would be asking for IMF coin instead of U.S. dollars.