Among many in the financial services industry, Bitcoin is of little interest – or an embarrassment, even. What bankers and insurers talk about is blockchain, the technology that enables the minting, distribution and acceptance of bitcoin or similar crypto-currencies.
But for the head of fintech investments at the International Finance Corporation, the private-sector arm of the World Bank, Bitcoin is the important thing, rather than its infrastructure.
Andi Dervishi, global head of the IFC’s fintech investment group, says Bitcoin may emerge as a competitor to the International Monetary Fund’s Special Drawing Rights, or SDR, a unit of accounting. (SDRs are not a currency, nor a claim on the IMF, but a potential claim on the freely usable currencies of IMF members.)
He said so during an Economist conference on fintech in Hong Kong, which is unusual for a representative of a Bretton Woods-era multilateral institution.
Although the IMF has been issuing papers for nearly 10 years speculating about what could replace the U.S. dollar as the world’s reserve currency, its conclusions have come up short because it weighed the prospects for other fiat currencies, such as the renminbi or the euro. However the SDR has been held up as a potential world currency, akin to the ‘bancor’ world currency proposed by John Maynard Keynes during the Bretton Woods negotiations; the U.S. prevailed in making the dollar the reserve currency.
“Bitcoin is a competitor to SDRs,” Dervishi said. “The IMF is looking at whether there should be a digital currency in the future.”
Although banks and other financial institutions may be wary of crypto-currencies, Dervishi says the creation of Bitcoin is attractive for people in countries that have known shock devaluations, arbitrary government appropriations or who have been subject to fraud.
Although in theory the IMF could create digital tokens based on SDRs, Dervishi says this can’t happen because the Fund lacks the ability to create the required payments network.
Passing on Ripple
He says the IFC considered early investments in Ripple, the company developing a crypto-currency for settlements. Dervishi’s mandate is to invest in startups in emerging markets, to help develop their fintech industries, or to invest in fintech companies that can benefit emerging markets. He says his team ultimately passed on Ripple because it is a commercial, for-profit enterprise.
This is not the case with Bitcoin, which gives it a unique status among crypto-currencies. “There is no company behind Bitcoin, so there is no one who can enrich themselves. Who gets rich on gold? The miners get something, but no one can manipulate the network.”
To that end, he says gold could become part of the SDR – which is now comprised of a basket of currencies: the dollar, British sterling, the euro, the yen and the renminbi. But Bitcoin can never become part of the SDR basket: its decentralized framework makes it too different.
One challenge for Bitcoin to assume such a role – beyond the obvious ones of demand and the willingness of governments to acquiesce – is that modern finance is based on fractional reserve banking. Bitcoin doesn’t allow for lending to generate a velocity of money: it’s just a series of buys and sells. In theory, a synthetic crypto-currency could be invented that replicates lending, but how contracts would be enforced is another mystery.
Today the idea of Bitcoin becoming a recognized currency alongside fiat money seems fantastical, at least when it comes to sovereign governments. But Dervishi notes that sometimes governments capitulate to powers beyond their control. Most Asian countries, including China, effectively outsource monetary policy to the United States. Smaller countries have completely dollarized their economies. Could a government one day decide to make Bitcoin its legal tender?