Blockchain Technology Holds Promise for Public Good in Payments, Say IMF Economists

As the world becomes increasingly digitized, the need for efficient and safe payment systems has never been more pressing. While cryptocurrencies have promised to revolutionize payments, their lack of regulation and trustworthiness has raised concerns among global financial bodies like the IMF and the Financial Stability Board. However, the technology behind crypto assets may hold greater promise for public policy objectives, according to a recent paper by IMF economists Tobias Adrian and Tommaso Mancini-Griffoli.

The paper suggests that the private sector’s innovation and customization of financial services may not ensure safe and efficient transactions, even with tight regulation. Instead, the public sector should leverage technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance.

The authors identify tokenization, encryption, and programmability as three key technologies that have revolutionized payments. Tokenization refers to representing property rights to an asset, such as money, on an electronic ledger. Encryption helps to decouple compliance checks from transactions, promoting transparency and trust. Programmability allows financial contracts to be more easily written and automatically executed, such as with “smart contracts.”

The private sector is currently innovating in ways that may be more transformative than the initial wave of crypto assets. Tokenization of stocks, bonds, and other assets may cut trading costs, integrate markets, and enlarge access. Stablecoins, which are compliant with regulation, may be used to pay for these assets. Banks are also testing tokenized checking accounts, while automation is widespread, allowing third parties to program functionality much as developers build smartphone apps.

The IMF authors also note that the public sector could leverage central bank digital currencies (CBDCs) to bring interoperability and efficiency among private networks for digital money and assets. They submit that CBDCs can act as both a monetary instrument and infrastructure essential to clear and settle transactions. The authors suggest that a public platform could allow banks and other regulated financial institutions to trade digital representations of domestic central bank reserves across borders, without requiring major changes to national payment systems.

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The platform would minimize risks inherent in contracts, ensure that contracts are fully backed with escrowed money, and automatically execute to avoid failed trades. Encryption can also help manage the transfer of information, allowing the platform to check that participants comply with anti-money laundering requirements while allowing them to bid anonymously for foreign exchange.

The authors note that much remains to be explored, and this vision is still taking shape. However, they conclude that technology that was originally meant to circumvent intermediaries and public oversight may actually be harnessed to inject interoperability, safety, and efficiency into private-sector innovation and customization for the public good.