At the recent Bank of England conference, the Managing Director of the International Monetary Fund (IMF) frankly spoke about the future of cryptocurrency and claimed that it is likely to replace the conventional banking system.
Lagarde referred in her speech to times where modern technology, such as computers or tablets, were not taking seriously and many experts predicted that they would not last long, or at least would be implemented only by the niche. As we all know, it all happened differently.
IMF’s Lagarde speculates that cryptocurrency is the future as much as the internet decades ago. She goes as far as to claim that digital currencies could replace central banks, traditional banking system and challenge some of the most monopolistic local currencies.
Unlike JPMorgan Chase CEO Jamie Dimon and billionaire businessman Ray Dalio, who recently criticised Bitcoin and called it a fraud, Lagarde is one of the first financial authorities to recognise Bitcoin potential.
At the same time, she acknowledges that there are still plenty of limitations when it comes to cryptocurrency and blockchain technology, but they should not stop anyone from looking at them as the future replacement of fiat currency.
Lagarde’s Remarks on Cryptocurrency
The brave talk was held in London, and it was aimed at those who still do not believe in the power or existence of digital currencies. Lagarde focused on explaining how financial technology will reshape the banking industry by 2040.
IMF’s Managing Director told the audience:
“It may not be wise to dismiss virtual currencies; instead, citizens may one day prefer virtual currencies.”
Here are the most important aspects covered by Lagarde:
Cryptocurrency Is a Different to Fiat Online Money
Lagarde made an important distinction between cryptocurrency and online payment providers, such as PayPal. Virtual currency is often misunderstood to be just like online money available on the account. She stressed, however, that cryptocurrency is in an entirely different category as they provide their unit of value.
Unlike fiat, digital currency is entirely decentralised, without an intrusion from a government or central bank. It has been designed on a peer-to-peer sharing network.
Cryptocurrency May Be Eventually More Profitable
When thinking about adopting cryptocurrency, it is important to put aside already established economies and focus on developing countries, with weaker institutions and unstable national currency.
She brought an example of Seychelles, where dollarisation had increased from 20 percent in 2006 to 60 percent in 2008. Hence, instead of adopting the non-native currency, some of these countries may want to explore the virtual currencies.
Lagarde made a valid point that individuals may prefer holding on to digital currencies, rather than spending them like fiat. Because in the future they may turn out to be easier to handle, especially once cryptocoins become more stable.
On the top of that, cryptocurrency has an advantage of being transparent, governed by a complex algorithm, which can be monitored by the authorities.
Digital Currency Can Offer Better Payment Services
Currently, traditional money transfers can come at a hefty cost especially if moving them across the borders. The demand for such services keeps growing, but making small value payments are still not profitable to be transferred.
This is where cryptocurrency will become even more useful – it is more convenient, without clearing delays and intermediaries that consume a big part of the transaction fee. We already have a cryptocurrency service that offers money transfers in less than 4 seconds anywhere around the world, with a minuscule extra payment – Ripple. It is a fantastic example of a developing blockchain technology that is already looked at by some of the major commercial banks.
The Challenges of Cryptocurrency Becoming a Future
Do not be misled – Legard is aware of all the risks and limitations that cryptocurrency holds.
For the time being, virtual currencies challenge the legal system which has to figure out on how to tax them and how to control a potential money laundering. As it is, they do not present much danger to fiat currency and central banks, something that has often been wrongly brought up.
Digital currencies are still in their early stage of development, with too much risk of volatility and scams to be able to overtake central banks. Following an excess of hackers’ attacks on some of the major cryptocoins, e.g. Bitcoin or Ethereum, citizens still do not hold enough trust towards them.
Legard also addressed that many of those challenges can be overcome in the future; hence we should not dismiss them.
In a world where technology and data are the kings, any innovation should not be discarded. Regarding cryptocurrency and traditional banking, the latter has to acknowledge the future threat of digital currency. Otherwise, they may be forced in the future to step down.
IMF’s Lagarde speculates that cryptocurrency is the future is one of the first steps towards the right direction. As a head of a significant financial authority, her saying will hopefully motivate others to make peace with the future of banking system, instead of trying to fight it.
Chritine Lagarde is the Managing Director of the International Monetary Fund and she has been holding the title since 2011.