The International Monetary Fund (IMF) believes that network effects may spark an insatiable blaze for mass adoption of cryptocurrencies. In their most recent report published on July 15, the IMF targets to set up a conceptual framework. In this concept, they will analyze and categorize digital monies like Facebook’s Libra and stablecoins. Additionally, they will think through the implications of the emergence of virtual currencies for central bank policy.
In the analysis of e-monies, that include but not limited to blockchain-based assets, the IMF seeks to determine the underlying factors driving the growth of the e-monies. They noted that the factors that might result in the rapid growth and mass adoption of the virtual assets include ubiquity, trust, convenience, low transaction costs, complementarity, and network effects.
According to that report, the first five reasons in that list could be responsible for the spark that lights the fire of e-money. The sixth reason is believed to have the potential to become the wind that may spread the blaze. Thus, the power that network effects have should never be underestimated since it can spread the adoption of new services.
To support these claims, the IMF refers to the rapid switch from email to SMS and then to social messaging platforms like WhatsApp. It is evident that the adoption of WhatsApp is considerably faster compared to the initial switch to email. WhatsApp’s 1.5 billion user base is attributable to word of mouth rather than to formal marketing methods.
The IMF also develops a taxonomy that supports its view of the thriving digital money industry. Notably, it has adopted the blockchain industry’s cornerstone principle of decentralization to become one of its primary classificatory parameters.
Devoting part of its analysis to the issue of central bank digital currencies (CBDCs), the IMF suggests a hybrid approach. Its integrated approach would be set up by a public-private partnership. That means the proposed asset will become a synthetic CBDC (sCBDC).
In the world of virtual money, the central bank would have limited responsibility. The prospective sCBDC will offer settlement services that include access to the reserves to cater to the e-money providers who would then encounter major regulations. That hybrid sCBDC is not full-fledged but would stand to benefit.
The virtual money will enable the private sector to innovate and simultaneously interact with consumers while primarily relying on the central bank to deliver trust and efficiency. The IMF concludes by:
“Much lies in the hands of central bankers, regulators, and entrepreneurs. […] but one thing is certain: Innovation and change are likely to transform the landscape of banking and money as we know it.”
The IMF managing director Christine Lagarde acknowledged that blockchain innovators are gradually shaking the traditional financial world. They are continuously having a clear impact on incumbent players. The IMF boss had even previously suggested that the organization could maybe release its local digital asset in the future.