2017 Bank of England Conference : Central Banking and Fintech—A Brave New World?
Giving an insightful speech at the Bank of England on Sept 29th, Christine Lagarde (IMF Managing Director) shared some interesting views on cryptocurrencies, Bitcoin and banking in general.
Her upbeat tone contrasted with recent statements by Ray Dalio (Billionaire founder of Bridgewater) and Jamie Dimon (CEO of JP Morgan) who respectively called Bitcoin a speculative bubble and a fraud.
Trying to imagine how the world would look like in 2040, Lagarde shared a few predictions on how Fintech would change central banking over the next generation.
She focused on three innovations:
Defined as peer-to-peer transaction systems without clearinghouses or central banks, Lagarde says virtual currencies such as Bitcoin “pose little or no challenge to the existing order of fiat currencies and central banks.”
The main reasons according to her:
- They are too volatile……
- too risky ……
- too energy intensive …..
- and the underlying technos are not yet scalable.
However some of these technological hurdles could be overcome in the near future, making it unwise to dismiss virtual currencies.
She goes on to give the example of a country where institutions are weak and unable to have a solid and stable currency:
- Virtual currencies might end up safer than paper money or coins
- Especially in remote regions
Their issuance could be controlled with a defined parity, using algorithms and a “smart rule”
“in many ways, virtual currencies might just give existing currencies a run for their money”
Efficient payment services is another area of potential growth, especially for economies that rely on decentralized services and peer to peer transactions. The low cost of transacting in virtual currencies could prove essential to these economies.
In the end “citizens may even call on central banks to provide digital forms of legal tender”, meaning they might one day prefer virtual currencies.
New models of financial intermediation
Christine Lagarde imagines that soon enough people might only keep minimal amounts of currency available for payments or in their wallets, the remaining being invested automatically in lending platforms or other forms of electronic funds.
This is a very interesting idea. She describes the bright new world of Fintech with constant product and service innovation, short development cycles and user-friendly interfaces.
“a world where data is king…. “
That also means central banks and institutions must imagine new forms of regulation. Especially if players outside the banking sphere start offering payment services without the appropriate balance sheet monitoring. She takes the example of social media platforms.
Trying to imagine how artificial intelligence will rock the banking world, Lagarde gives a few interesting ideas:
- since we are increasingly in a world of ubiquitous and abundant data, there will be value in making that data intelligent;
- assisting policy makers in making better (or real-time) forecasts, identifying bubbles,…
Despite these techno leaps, there will still be a place for humans because it’s hard to imagine policy making done by a computer, and it’s even harder to consider the topic of accountability if it’s machines driving economic policy.
“so no, I do not see machines taking over monetary policy”
Lagarde concludes by embracing this brave new world but also promoting a responsible approach to it, because the system needs to work for all.
This speech is definitely one of the most inspiring and thoughtful in recent years, I recommend you read it in full.
2018 update : Winds of Change: The Case for New Digital Currency
At the Singapore Fintech Festival in Nov 2018, Christine Lagarde made another very interesting speech on the topic of Central Bank Digital Currencies.
2020 update as Head of ECB
In a later speech, Christine Lagarde, now as head of the ECB, declared: “We Want to Develop Digital Currencies but Won’t Discourage Private Initiatives”.