The outgoing chief of the International Monetary Fund (IMF), Christine Lagarde, who is also one of the front runners for the presidency of the European Central Bank (ECB), has urged central banks and financial institutions to remain resolute on protecting consumers but should not close the door on innovations such as cryptocurrencies.
She made these remarks in her opening statement to the Economic and Monetary Affairs Committee of the European Parliament on Sept. 4.
Lagarde has served as the director of the IMF since July 2011 and tendered her resignation a few months ago to take over the helm of the ECB.
The former French Finance Minister told the committee that her tenure at the IMF was based on inclusivity, diversity, and opening to civil society. She will likely take these strategies to the ECB and is of the view that central banks and financial institutions should embrace change and the opportunities they bring.
“In the case of new technologies – including digital currencies – that means being alert to risks in terms of financial stability, privacy or criminal activities, and ensuring appropriate regulation is in place to steer technology towards the public good. But it also means recognizing the wider social benefits from innovation and allowing them space to develop.”
Lagarde highlighted that the banking landscape has shifted significantly since the 2008 financial crisis. The crisis led to the collapse of many institutions including Lehman Brothers, which was the fourth-largest bank in the US at the time.
“Bank profitability is low. And the landscape of the financial sector is being changed by the growing role of non-banks in intermediation and technological transformation,” she said and added that “The share of non-bank financing flows to euro area firms has risen from around 30% before the crisis to more than 50% today. Fintech firms now receive around a quarter of the financial service industry’s venture and startup funding.”
Incidentally, bitcoin, the first cryptocurrency was introduced in late 2008 and the Genesis block released on Jan. 3, 2009 with the message from the London Times headline of the same day:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Lagarde will breath new life to the ECB
The current head of the ECB, Mario Draghi, is not a big fan of cryptocurrencies and has labeled them assets and not currencies.
“Cryptocurrencies or bitcoins, or anything like that, are not really currencies — they are assets. A euro is a euro — today, tomorrow, in a month — it’s always a euro. And the ECB is behind the euro. Who is behind the cryptocurrencies? So they are very, very risky assets.”
If she is confirmed as the president of the ECB, Lagarde promises to combine “firm commitment to the mandate with the agility to adapt as the world around us changes.”
Lagarde, who would become the first woman to head the ECB if she is elected, has recently shifted towards a more innovative and open approach to digital innovations in financial institutions. She has the potential to change the perception of the ECB on cryptocurrencies as she has previously spoken positively about them.
She has said that cryptocurrencies are “inevitable,” – the same sentiment echoed by Malta’s Prime Minister Joseph Muscat who has labeled cryptocurrencies the inevitable future of money. She is on record for saying blockchain is shaking the traditional financial world.
Speaking at a fintech festival in November 2018, Lagarde urged central banks to explore Central Bank Digital Currencies (CBDC).
She added that digital currencies such as bitcoin are “vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.”
Countries such as China, Sweden, and Uruguay have considered the issuance of digital currency, with China reportedly being close to issuing its digital currency.
Eswar Prasad, a former IMF economist who is now a professor at Cornell University has confidence in Lagarde and believes that she may contribute towards the growth of the eurozone through her policies.
Prasad said the outgoing IMF chief might be good at building consensus “but whether she can provide the sort of visionary and creative technocratic leadership that Draghi brought to the job remains to be seen.”
The new ECB president will take over when the current president, Draghi, leaves office on Oct. 31. Global leaders are currently not impressed by Facebook’s foray into the financial sector after introducing the Libra cryptocurrency expected to launch in 2020. It is interesting to see what Lagarde’s position will be if is confirmed the head of Europe’s central bank.