Forget Bitcoin, think IMFcoin. The head of the International Monetary Fund has been musing about the future of money, and thinks there is a decent chance it will come from the guardian of the world’s monetary system.

Christine Lagarde, IMF managing director, held up the organization’s special drawing rights (SDRs) as having a possible digital future at a Bank of England forum last week, and put what she said was a “question mark” over whether SDRs could replace existing international currencies. “It’s not a far-fetched hypothetical,” she said, and the IMF needs to be ready.

The SDR is a long way from the digital disruption that cypherpunks hope cryptocurrency can deliver. Dreamed up in the 1960s, SDRs are a kind of artificial currency whose value depends on other currencies. Dollars are a part of it, but so are euros, sterling, renminbi and yen. An SDR is a bit like a currency mutual fund for central banks.

For decades it has been an afterthought in the global financial system, but the IMF has spent the past year thinking about how to give SDRs a broader international role. So could some sort of crypto-SDR eventually replace the dollar as the world’s money?

The idea has heavyweight support from those who want to diminish the dollar’s status, notably in China. People’s Bank of China Governor Zhou Xiaochuan called in 2009 for wider use of the IMF’s money to “gradually replace existing reserve currencies with the SDR,” one reason for the latest review.

The reasons are well-rehearsed, and not digital. China—and other emerging markets—would like to diversity their risk away from dollars. They also worry about the inherent problem of using national money for global reserves. When the U.S. faces a conflict between domestic and international needs, it is likely to favor its voters over the world economy.

So what would digital SDRs add? When monetary economists are drawing up dream scenarios, they often come up with something similar to the “bancor” presented by John Maynard Keynes at the 1944 Bretton Woods conference. International trade would be conducted in bancors with rules about the size of overdrafts allowed, preventing imbalances getting too big.

SDR or IMFcoins would allow a much wider group to use the currency, supplanting the dollar in international trade and reducing both the big currency swings that can destabilize countries and the dangers of large current account deficits. Instead of representing a basket of currencies, the digital SDR would be a currency of its own, albeit one only used for international transactions.

A more limited alternative would try to speed global growth. At the moment, countries hold big piles of dollars as a form of insurance against a balance of payments crisis, damping growth and distorting the world economy. If the IMF was empowered to act more like a global central bank, whisking up new SDRs on its own blockchain in a crisis, it would reduce the need for countries to hold reserves.

José Antonio Ocampo, a Colombian central bank board member also on the IMF’s expert group considering the future of the SDR, thinks annual SDR issuance could be worth $200 billion to $300 billion a year.

“Countries would not have to accumulate reserves, [which] generate a general contractionary effect on the global economy,” he says.

The prospect of giving the IMF the ability to execute global helicopter drops of money worries believers in strong currencies.

Jim Rickards, an author and former general counsel for failed hedge fund Long-Term Capital Management, thinks SDRs will be issued to reflate the system in the next crisis, hurting the dollar’s reserve status. “It’s all converging on a world where the dollar will just be a local currency like the Mexican peso,” he says. He is a longstanding advocate of using gold to back money to limit the supply.

The real opposition to an IMFcoin is likely to come not from fans of gold, but from defenders of the dollar’s central role in the global system. Sterling once held the role of global reserve currency, and spent decades in decline once it was abandoned in favor of the dollar, reducing demand for pounds.

The benefit of having the reserve currency is obvious, and much-envied: Americans can offer to buy real things from the rest of the world with money the Federal Reserve creates out of nothing, and other countries have little choice but to accept. The U.S. gets lower interest rates than it otherwise would and can run a permanent current-account deficit with impunity—just so long as it remains the reserve currency.

There is a downside to having the reserve currency, though. The purchase of dollars by the rest of the world makes it harder for the U.S. to devalue to support its own economy. When the banking crisis hit in 2008 investors piled into the reserve currency, and the dollar soared 21% against its trading partners before the panic abated in March 2009. Instead of the weaker currency central banks usually aim for in a recession, the U.S. got a stronger currency.

There is little chance U.S. politicians will want to give up what a French finance minister once called the “exorbitant privilege” of the dollar, no matter what Ms Lagarde, another former French finance minister, might suggest. As she noted, the IMF would need a “geopolitical situation that would be propitious” for the changes she is speculating about to happen.

China wants it, and has been encouraging the issuance of SDR-denominated bonds to try to create a true alternative to the deep and liquid markets of the U.S. (China’s had little success so far, with only two SDR bonds outstanding, according to Thomson Reuters). Ms. Lagarde’s paean to the future suggests she likes the idea. Luckily for those holding dollars, the geopolitical situation is still tilted in favor of the U.S., and there is little prospect we all be trading in IMFcoins any time soon.

Published Date:2017-10-06