The advance of bitcoin and other digital currencies could make the global financial system safer despite the prospect of “inevitable” accidents waiting to happen, the head of the International Monetary Fund has said.
Christine Lagarde said some tools built using the technology behind bitcoin, which are known collectively as crypto-assets, hold the potential to revolutionise the world of high finance by making it faster, cheaper and safer. Among them, there are “real threats and needless fears”, she said.
Writing in a blogpost as politicians and central bankers gather in Washington for the IMF’s regular spring meetings, she said there was hope for a world where firms using digital currencies could coexist alongside traditional banks.
That level of diversity could build a “financial ecosystem that is more efficient and potentially more robust in resisting threats”, she said.
An increasing number of consumers have used cryptocurrencies as an alternative to the old ways of holding and moving money and prefer them to traditional banks, which crashed in the 2008 financial crisis. However, many have lost money from volatile price movements and after some cryptocurrency exchanges have been hacked.
Lagarde has previously issued warnings over the risks posed by bitcoin and other digital currencies, calling for global regulators to stage a crackdown by using its technology to “fight fire with fire”.
Last month, she said authorities around the world could harness the potential of cryptocurrencies to help bring them under control. Failure to do so would allow the unfettered development of a “potentially major new vehicle for money laundering and the financing of terrorism,” she added.
The governor of the Bank of England, Mark Carney, has called Bitcoin and other cryptocurrencies “inherently risky” and that they have failed to fulfil their most basic function as money. Bitcoin hit almost $20,000 (£13,958) in value in the run-up to Christmas, before crashing by more than half earlier this year.
But ahead of the IMF’s forthcoming global financial stability report, which looks at emerging risks from the world of banking, Lagarde said there were merits from looking again at crypto-assets. “A clear-eyed approach can help us harness the gains and avoid the pitfalls,” she said.
Comparing recent developments to the advances of the 1990s – when thousands of technology companies were started only to collapse a few years later during the dot-com crash – she said many crypto-assets were bound to fail. More than 1,600 digital currencies are in circulation, having ballooned in number in recent years.
However, just as a few technologies that emerged during the dot-com era have since transformed the world, she said crypto-assets that survived this process of “creative destruction” could have a significant impact on how we save, invest and pay our bills.
This story originally appeared in The Guardian. Image courtesy of Shutterstock.