With more than 1,600 crypto-assets in circulation, the Managing Director of the International Monetary Fund Christine Lagarde writes that it seems inevitable that many of those virtual currencies will not survive the process of creative destruction.
What are some of the potential benefits of crypto-assets?
Fast, inexpensive
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Crypto-assets enable fast and inexpensive financial transactions, while offering some of the convenience of cash. Some payment services now make overseas transfers in a matter of hours, not days. If privately issued crypto-assets remain risky and unstable, there may be demand for central banks to provide digital forms of money.
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The underlying technology of crypto-assets—distributed ledger technology, or DLT—could help financial markets function more efficiently. Self-executing and self-enforcing “smart contracts” could eliminate the need for some intermediaries. Already, the Australian Securities Exchange has said it plans to use DLT to manage the clearing and settlement of equity transactions.
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Secure storage of important records is another promising use for DLT. Healthcare companies are studying how to use the technology to maintain confidential medical data while providing access to insurers and other authorized users.
In developing economies, such advances can help secure property rights, increase market confidence and promote investment. In Ghana, where property ownership is often the subject of disputes, a DLT-based platform called Bitland promises to help solve the problem by securely recording land sales.
The fintech revolution will not eliminate the need for trusted intermediaries, such as brokers and bankers. There is hope, however, that decentralized applications spurred by crypto-assets will lead to a diversification of the financial landscape, a better balance between centralized and de-centralized service providers, and a financial ecosystem that is more efficient and potentially more robust in resisting threats.
Before crypto-assets can transform financial activity in a meaningful and lasting way, they must earn the confidence and support of consumers and authorities. An important initial step will be to reach a consensus within the global regulatory community on the role crypto-assets should play. Because crypto-assets know no boundaries, international cooperation will be essential.
Author concludes: “Understanding the risks that crypto-assets may pose to financial stability is vital if we are to distinguish between real threats and needless fears. That is why we need an even-handed regulatory agenda, one that protects against risks without discouraging innovation.”
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