- Assets could underpin ‘e-money’ as tech firms seek to stabilise their growing payment networks.
- The rise of digital money has led to a battle between company-backed e-money and bank-offered b-money.
- An extension of central bank reserves could help alleviate the main kinds of e-money risk.
By Jessica Sier
Baskets of assets are likely to underpin digital money as tech firms look to stabilise their growing payment networks and their corresponding ‘e-money’, according to a recent International Monetary Fund (IMF) Fintech Note, The Rise of Digital Money.
As Alipay and WeChat Pay sweep China, M-Pesa claims East Africa and Facebook’s social media-driven Libra manoeuvres to facilitate millions of global payments, the IMF has outlined the battle between company-backed e-money and bank-offered b-money in our globalised world.
“Big tech are experts at delivering convenient, attractive, low-cost and trusted services to a large network of customers,” write the paper’s authors, Tobias Adrian and Tommaso Mancini-Griffoli. “But because e-money does not benefit from government backstops as does b-money, it might not always be in a position to honour redemption requests.
“Liquidity, default, market and foreign exchange rate risk all potentially undermine the guarantee of redeemability at face value.”
Despite the risks, the IMF predicts convenience and speed are likely to win over the wallets of millions of cross-border customers, meaning central banks and regulators will need to update their processes to protect users and offer a means of stabilisation.
One method is to borrow the structure of ‘stablecoins’, where tech firms secure their virtual currencies with a complex and varyingly dependable basket of assets. These underlying assets could range from central bank reserves or a raft of global currencies to personal shareholdings.
“Today’s new entrants in the payment arena may one day become banks themselves and offer targeted credit based on the information they have acquired; the banking model as such is thus unlikely to disappear,” states the paper. “Cash and bank deposits will battle with e-money, electronically stored monetary value denominated in, and pegged to, a common unit of account such as the euro, dollar, or renminbi, or a basket thereof.”
For accountants, understanding the underlying assets, their value and their jurisdiction may become important as they look to untangle and understand the financial affairs of clients receiving payments via private company channels and platforms.
The three types of claim-based money
The IMF defines three categories of ‘claim-based’ money – e-money, b-money and i-money – where payers can be recognised as the rightful owners of the claim they offer, and the transfer can be registered by all parties. E-money is where companies issue a debt-like instrument for use on their platforms. B-money is commercial bank deposits backstopped by governments. I-money tokenises shares in private investment funds.
Libra, announced by Facebook and the Libra Association in July, is a digital coin backed by a portfolio of bank certificates of deposit and short-term government paper. The portfolio is supported by a group of organisations and backed by assets called Libra Reserves.
“Libra coins could be exchanged into fiat currency at any time for their share of the value of the underlying portfolio, without any price guarantees,” write the paper’s authors, but they warn that while the transfer of Libra could comprise a payment, depositors might be at risk should the Libra Association collapse.
Central banks can offer security
The IMF paper argues an extension of central bank reserves could provide security to companies offering international cross-border payments and alleviate the main kinds of e-money risk.
One risk is to the effectiveness of monetary policy in countries with weak institutions and high inflation. Should use of a foreign e-money spread, the domestic unit of account could switch to e-dollars if businesses and households found it more useful and secure than their home currency.
Another risk is that technology giants could further solidify their global monopolies and use their networks to monetise data on customer transactions and shut out competitors.
Third, we currently have consumer protection and financial stability laws that safeguard people from runs on institutions, but if stablecoins are to spread widely, there must be legal clarity about what instruments they actually are so these protections can extend and include them.
The IMF suggests the advent of central bank digital money (CBDC), a digital version of central bank reserves, to provide stability and protect against consumers losing their capital should the e-money provider collapse.
But rather than issue e-money one for one with central bank reserves, and receive protection against other creditors if the e-money provider goes bankrupt, the report suggests a synthetic CBDC, where the central bank would offer settlement services to e-money providers, including access to central bank reserves.
“E-money may be more convenient as a means of payment but questions arise on the stability of its value,” concludes the report. “If 10 euros go in, 10 euros must come out. The issuer must be in a position to honour this pledge.”