A new IMF paper discusses the impacts fintech will have on currency issuance, monetary policy implementation, and payment system soundness, among other functions of a central bank.
The IMF (International Monetary Authority) has published a new paper outlining the impacts and challenges of fintech on central bank governance, and how central banks can best deal with the impacts from a legal perspective.
The paper says fintech presents unique opportunities for central banks to enhance the execution of core functions such as currency issuance and payment systems. However, some aspects of fintech pose major challenges for central bank governance especially with the emergence of new technologies such as DLT (distributed ledger technology), AI (artificial intelligence) and data analytics.
As the private sector leverages new technologies to advance efforts to develop financial services and asset classes that can compete in the traditional domain of central banks, major components of the national and international payment infrastructure could become dominated by private firms and networks.
“This, in turn, could impair [central banks’] capability to deliver on monetary policy mandates and undermine their issuance monopoly for currency,” the paper says.
The paper discusses the impacts fintech will have on currency issuance, monetary policy implementation, payment system soundness, and the Lender-of-Last-Resort (LOLR) function. It also outlines steps central banks should take to address these impacts, including to review and analyse the legal frameworks under which they operate.
As central banks increasingly entering into arrangements with their peers to collaborate in responding to fintech (for example, on wholesale CBDC), issues arise with respect to ensuring they have a firm legal basis to enter into cross-border inter-central bank collaboration arrangements.
For such arrangements with other central banks, legally binding contracts – rather than traditional nonbinding memoranda of understanding – may be more appropriate as legal instruments, the paper says.
The paper also outlines ten legal steps a central bank must take to “prepare its governance for a world of fintech”.
The paper is published here (download).
