IMF to launch global Digital Currency platform to facilitate international funds transfer

Central Bank Digital Currency (CBDC)

The Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, has announced the IMF’s plans to launch a platform facilitating transactions between countries using Central Bank Digital Currency (CBDCs).

This development comes in the wake of a report by Atlantic, which highlighted 2023 as a significant year for CBDC exploration. The managing director explained that there are already 114 central banks at some stage of CBDC exploration, “with about 10 already crossing the finish line”.

Speaking on the proposed plan at a conference attended by African central banks in Rabat, Morocco, the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva said:

CBDCs should not be fragmented national propositions… To have more efficient and fairer transactions we need systems that connect countries: we need interoperability… For this reason at the IMF, we are working on the concept of a global CBDC platform.

Kristalina Georgieva

The objective of the Global Central Bank Digital Currency platform proposed by the IMF is to establish a unified regulatory framework for digital currencies among central banks. The aim is to enable global interoperability, ensuring that digital currencies can seamlessly interact and function across different jurisdictions.

“If countries develop CDBCs only for domestic deployment we are underutilizing their capacity,” she added.

Technext reported earlier that the Central Bank of Nigeria (CBN) announced the introduction of its digital currency – eNaira, as a payment option to recipients of diaspora remittances. The apex bank says the move is part of its efforts to liberalize the payout of diaspora remittance.

In a report titled ‘Nigeria’s eNaira, One Year After’, the IMF had said network effects suggest the initial low adoption spell would require a coordinated policy drive to break it. According to it, if the adoption of digital currency is to be significant, then it requires some form of strategy between it and mobile money infrastructures.

Read Also: Nigerians may yet embrace eNaira if FG commits to G7’s resolution of transparency, data protection and sound economics

What is Central Bank Digital Currency (CBDC)?

A Central Bank Digital Currency (CBDC) refers to a digital currency that is under the control and regulation of a country’s central bank. Unlike cryptocurrencies such as Bitcoin and Ether, CBDCs are centralized digital assets. The central bank acts as the monetary authority overseeing CBDCs, whereas cryptocurrencies are typically decentralized.

Although, the concept of Central Bank Digital Currency (CBDC)s has generated its fair share of controversy mainly due to the misperception that they are synonymous with cryptocurrencies. It is important to note that CBDCs should not be confused with cryptocurrencies, as they are distinct entities.

Cryptocurrencies cannot be directly regulated by a single authority, unlike CBDCs which can be regulated by a centralized entity, such as the proposed global Central Bank Digital Currency platform. CBDCs operate within a different framework, guided by regulatory oversight and compliance with monetary policies set by the central bank.

However, launching a global Central Bank Digital Currency platform might just help promote financial inclusion and make remittances cheaper. As the IMF managing director explained, the average cost of money transfers stands at 6.3% amounting to $44 billion annually.

She further stressed that “CBDCs should be backed by assets and added that cryptocurrencies are an investment opportunity when backed by assets, but when they are not they are a speculative investment”.

Will this promote international funds transfer?

The launch of a global Central Bank Digital Currency platform by the IMF has a high potential to promote international funds transfer but this will require widespread adoption and cooperation among participating countries. It will also involve addressing potential challenges such as regulatory frameworks, interoperability, and technological infrastructure.

Some of the ways it can positively affect international funds transfer are by streamlining cross-border transactions. This will provide a standardized and efficient mechanism for transferring funds between countries thus reducing transaction costs and processing times.

Also, the launch of a global Central Bank Digital Currency platform is likely to help in the reduction of intermediaries i.e. eliminating or minimizing the need for multiple intermediaries involved in cross-border transactions. It would also contribute to supporting a more efficient exchange rate mechanism that would be beneficial to participants in international funds transfer.

Read Also: CBN’s introduction of eNaira for diaspora remittances may increase adoption

What this could mean for the Nigerian ecosystem

Nigeria took a significant step in October 2021 by launching its own Central Bank Digital Currency called eNaira, aiming to provide a digital alternative to cash. However, despite its potential, eNaira has yet to garner massive adoption due to Nigeria’s prevailing preference for cash and the presence of a high number of unbanked and financially illiterate individuals.

IMF plans to launch a global Central Bank Digital Currency (CBDC) platform

As a result, the introduction of a global CBDC by the IMF could pose several challenges and potential effects on Nigeria’s economy and financial stance. The widespread adoption of a CBDC in Nigeria may not occur immediately if there is a strong inclination toward cash usage as we see with eNaira. People accustomed to physical currency may be reluctant to transition to digital transactions, limiting the initial impact of the IMF’s CBDC in the country.

Also, Nigeria faces the hurdle of a large unbanked population and low levels of financial literacy which pose challenges to the adoption of digital currencies. To successfully implement a CBDC, efforts would be required to educate the population and provide access to digital payment infrastructure. Neglecting these issues could worsen existing inequalities and exclude a significant portion of the population from participating in the digital economy.

The coexistence of the IMF’s CBDC with Nigeria’s physical currency could lead to a dual currency environment. Managing monetary policy in such a scenario would become more complex for the Central Bank of Nigeria (CBN), as it would need to navigate the implications of both digital and physical currencies. This includes considering potential impacts on money supply, inflation, and exchange rates.

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