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Your homework is this. First, find an English-language news article about Economics (n.b. IMF is a great resource). Then, create a post here on Padlet, linking the article that you found. After that, I want you to find THREE words/phrases/concepts from the article that you didn't know before you read it. Add them to your post with definitions, example sentences, and if possible etymology. Finally,  comment on three different classmates' posts, using one of their new words.

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https://blogs.imf.org/2021/07/26/cryptoassets-as-national-currency-a-step-too-far/

In addition to being quite informative and comprehensive, this article on the future and perspectives of cryptoassets contains some interesting English words or phrases, for instance:

1) Monetary unit - an official name of currency in a country.
Euro became a monetary unit of Eurozone countries in 1999.

2) To catch on - to become popular or commonly used.
Example sentence:
Many foreign words promptly caught on in Russia and became a part of day-to-day Russian language.

3) Money laundering - actions aimed at making ill-gained money look like legally made money.
Example sentence:
People who do money laundering may be sentenced to several years of imprisonment if being caught.

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By Tobias Adrian and Rhoda Weeks-Brown

New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.

But doing so is not straightforward. It requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.

Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.

Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account. Their value can be extremely volatile. Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.

And yet, Bitcoin lives on. For some, it is an opportunity to transact anonymously-for good or bad. For others, it is a means to diversify portfolios and hold a speculative asset that can bring riches but also significant losses.

Cryptoassets are thus fundamentally different from other kinds of digital money. Central banks, for instance, are considering issuing digital currencies-digital money issued in the form of a liability of the central bank. Private companies are also pushing the frontier, with money that can be sent over mobile phones, popular in East Africa and China, and with stablecoins, whose value depends on the safety and liquidity of backing assets.
Cryptoassets as legal tender?
Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency.

If a cryptoasset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
Countries can even go further by passing laws to encourage the use of cryptoassets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases.

Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.

Even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset.

A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.

Then again, real currency may not always be readily available, nor easily transferable. Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.
Proceed with caution
The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability. If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.

Also, monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, it "imports" the credibility of the foreign monetary policy and hope to bring its economy-and interest rates-in line with the foreign business cycle. Neither of these is possible in the case of widespread cryptoasset adoption.

As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of market valuations.

Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country's financial system, fiscal balance, and relationships with foreign countries and correspondent banks.

The Financial Action Task Force has set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks. But enforcement of that standard is not yet consistent across countries, which can be problematic given the potential for cross-border activities.

Further legal issues arise. Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion. Moreover, the official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations. And changes to a country's legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.

In addition, banks and other financial institutions could be exposed to the massive fluctuations in cryptoasset prices. It is not clear whether prudential regulation against exposures to foreign currency or risky assets in banks could be upheld if Bitcoin, for instance, were given legal tender status.

Moreover, widespread cryptoasset use would undermine consumer protection. Households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks. While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer.

Finally, mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions. The ecological implications of adopting these cryptoassets as a national currency could be dire.
Striking a balance
As national currency, cryptoassets-including Bitcoin-come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut.

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Cryptoassets as National Currency? A Step Too Far

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By Tobias Adrian and Rhoda Weeks-Brown عربي, 中文, Español, Français, 日本語, Português, Русский New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers. But doing so is not straightforward.

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Cryptoassets as National Currency? A Step Too Far

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Cryptoassets as National Currency? A Step Too Far

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Even if you are not interested in this sphere take a look at this significant article.

1-st word:

prudential - sensible and careful when you make judgements and decisions.

prudential = sensible, reasonable, discreet.

Examples:

- Prudential laws reduce the likelihood of popular strikes.

- The company made a prudential decision that increased its profits.

Etymology:

prudent(EN) + evidential(EN) = prudential.

2-nd word:

to be quoted - to give a market price for shares, gold or foreign money.

Examples:

- A huge number of companies' shares are quoted on the stock market.

- Tesla's shares are quoted higher than their real price.

Etymology:

coter(FR) = rate, cote(FR) = share.

3-rd word

fraud - the crime of cheating somebody in order to get money or goods illegally.

Examples:

- In connection with the development of digital money the fraud rate increased.

- The fraud is a global problem, which is almost impossible to get rid of.

Etymology:

fraus, fraud(LATIN) = deceit,injury.
fraude(OLD FR) = cheat, fraud.

Aleksey Baryshev

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By Tobias Adrian and Rhoda Weeks-Brown

New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.

But doing so is not straightforward. It requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.

Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.

Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account. Their value can be extremely volatile. Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.

And yet, Bitcoin lives on. For some, it is an opportunity to transact anonymously-for good or bad. For others, it is a means to diversify portfolios and hold a speculative asset that can bring riches but also significant losses.

Cryptoassets are thus fundamentally different from other kinds of digital money. Central banks, for instance, are considering issuing digital currencies-digital money issued in the form of a liability of the central bank. Private companies are also pushing the frontier, with money that can be sent over mobile phones, popular in East Africa and China, and with stablecoins, whose value depends on the safety and liquidity of backing assets.
Cryptoassets as legal tender?
Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency.

If a cryptoasset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
Countries can even go further by passing laws to encourage the use of cryptoassets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases.

Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.

Even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset.

A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.

Then again, real currency may not always be readily available, nor easily transferable. Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.
Proceed with caution
The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability. If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.

Also, monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, it "imports" the credibility of the foreign monetary policy and hope to bring its economy-and interest rates-in line with the foreign business cycle. Neither of these is possible in the case of widespread cryptoasset adoption.

As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of market valuations.

Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country's financial system, fiscal balance, and relationships with foreign countries and correspondent banks.

The Financial Action Task Force has set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks. But enforcement of that standard is not yet consistent across countries, which can be problematic given the potential for cross-border activities.

Further legal issues arise. Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion. Moreover, the official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations. And changes to a country's legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.

In addition, banks and other financial institutions could be exposed to the massive fluctuations in cryptoasset prices. It is not clear whether prudential regulation against exposures to foreign currency or risky assets in banks could be upheld if Bitcoin, for instance, were given legal tender status.

Moreover, widespread cryptoasset use would undermine consumer protection. Households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks. While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer.

Finally, mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions. The ecological implications of adopting these cryptoassets as a national currency could be dire.
Striking a balance
As national currency, cryptoassets-including Bitcoin-come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut.

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Cryptoassets as National Currency? A Step Too Far

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By Tobias Adrian and Rhoda Weeks-Brown عربي, 中文, Español, Français, 日本語, Português, Русский New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers. But doing so is not straightforward.

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THE CASE AGAINT SELLING EQUITIES    Homework (aliya allakhverdieva)

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THE CASE AGAINT SELLING EQUITIES    Homework (aliya allakhverdieva)

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I found this article suitable for our homework as it includes new vocabulary from the very first paragraph.

1. Equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets.
The word "equity" comes from the Latin root meaning “even,” “fair” or “equal.”
Example: Many people in the US lost millions of dollars due to equity market crash in 1929.
2. Fiat currency is a government-issued currency that is not backed by a commodity such as gold.
The term is derived from the Latin word fiat, which means a determination by authority.
Example: All the major global currencies such as U.S. dollars and euros are fiat currencies.
3. Plethora basically means an overabundance of something.
"Plethora" comes from a similar Greek word meaning "fullness."
Example: A plethora of goods lead to price reduction

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Assuming that you've remained fully invested since last year's pandemic-driven market lows and have periodically rebalanced back to your target asset allocation, your portfolio has grown substantially over this time frame. Following the sharp declines from the onset of the pandemic, the equity markets have been on a breathtaking tear, approximately doubling in value. You may be tempted to bail - at least partially - on equities and move to the safety of cash. You wouldn't be alone.

There are many legitimate factors that one can easily look towards as a reason for lightening up on market risks: the Covid Delta variant; the Fed rolling back its easy money policy driven by inflation concerns; the strong dollar relative to other fiat currencies; slower growth rates from China, just to name a few. An argument can be made that based on these factors, as well as a plethora of other reasons, equities currently are overvalued. Many market analysts, and television talking heads, are advising investors to lighten up on stocks because they believe the equity markets are, indeed, overvalued. Although I can make a cogent argument to either support or contradict this premise, doing so would be a waste of time as my opinion on market valuations is irrelevant. Rather than add to the noise, I'll discuss why I'm not lightening up on equities regardless of that which currently is unknowable - whether markets are appropriately valued.

I'm an unapologetic asset allocator. My recommendation is that you create an appropriate asset allocation for your portfolio, rebalance it when necessary, and ignore the plethora of market prognostications. This is difficult advice to follow in every market, as it is easy to be torn between locking in gains and cutting losses.

By "an appropriate asset allocation" I mean one that is goals-based and thoughtfully balances risk and reward relative to your circumstances, not just an age-based "rule of thumb" asset allocation. Besides age, your asset allocation should consider both objective and subjective factors such as: your time horizon (when will you need to draw down funds, and for how long); your risk tolerance (over time, not just in the moment) your prior experience investing in various asset classes (investing in the unfamiliar is a prescription for anxiety); your current and anticipated lifestyle (expenses and other portfolio outflows); your non-portfolio sources of income; and your ability to replace lost capital.

Once you decide on your asset allocation, as asset classes rarely rise and fall proportionally, it is important to periodically "rebalance" your portfolio back to its target. Rebalancing can be a test of fortitude, as it requires selling off equities when they are rising, and even more so, buying equities when they are declining. I recommend a thorough portfolio review and rebalancing back to your target at least quarterly, or more frequently when an asset class is more than 5% off its target.

Although I don't recommend modifying your target asset allocation based on market prognostications, it also should not be viewed as completely stagnant. Most of the inputs going into the construction of one's asset allocation tend not to vary much over short periods of time, but sometimes they do. You should consider modifying your asset allocation to reflect longer term changes in your lifestyle such as retirement, relocation, changes in your family's structure, and modifications of your life objectives.

In March of last year, as equities were tanking following the onset of the coronavirus, I expressed my commitment to asset allocation in this column: "Coronavirus and the Markets: What Do We Really Know?"

"Adjusting one's portfolio to rebalance into asset classes that have declined is smart. Adjusting one's asset allocation to reflect changes in long-term financial objectives, and evolving risk tolerances, always is appropriate. Going into cash out of fear, with the intention of coming back into equities at better valuations isn't a strategy - it's the definition of market timing, which rarely works out well."

Going back to my initial question on the temptation to sell equities because of concerns over market valuations, I find that reducing your exposure to equities is not going to be your toughest decision. Going to cash, especially to lock in gains, is relatively easy, even if at a significant tax cost. The tougher, and more complicated decision is: "when do I reenter the equity markets?" Unless you intend to change your long-term asset allocation, going to cash is a temporary decision. Before doing so, you need to ask yourself: What does reentry look like? Generally, the quick answer is: "at more reasonable valuations." Based on my experience with clients going to cash, and intending to eventually go back into equities, rarely does any reentry point seem comfortable. Should equities continue to rise, even after a slight pullback, you may find it difficult to reinvest at a higher price point. Doing so can feel foolish for obvious reasons, including the very real fear of prices subsequently falling after you reinvest (your initial motivation for selling) and then getting whipsawed. Alternatively, should prices fall from where you sold, you'll feel smart, but then may be asking yourself if they've falling enough for you to be comfortable with their lower valuations, and to offset the tax cost of having sold - think about the adage of catching the proverbial falling knife. Both outcomes challenge our cognitive biases.

On a final note, be assured that at some point there will be a significant market correction - and it will be extremely unnerving when it occurs. And although it will be painful, equities will come back - eventually. And when they do, you'll be rewarded for remaining invested.

... Read More

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Assuming that you've remained fully invested since last year's pandemic-driven market lows and have periodically rebalanced back to your target asset allocation, your portfolio has grown substantially over this time frame. Following the sharp declines from the onset of the pandemic, the equity markets have been on a breathtaking tear, approximately doubling in value.

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https://blogs.imf.org/2021/06/14/how-to-attract-private-finance-to-africas-development/

While I was reading this article, I found some useful words:

1) Immense - a word, which means "huge" or "extremely large".
Example: There are some employees who have immense chances of being promoted.

2) To constrain - to have a limit to do something.
Example: Today some people constrain their income.

3) Insentive - this word means a "motivation".
Example: It is necessary to have an insentive because in this way we work harder.

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By Luc Eyraud, Catherine Pattillo, and Abebe Aemro Selassie

African economies are at a pivotal juncture. The COVID-19 pandemic has brought economic activity to a standstill. Africa's hard-won economic gains of the last two decades, critical in improving living standards, could be reversed.

High public debt levels and the uncertain outlook for international aid limit the scope for growth through large public investment programs. The private sector will have to play more of a role in economic development if countries are to enjoy a strong recovery and avoid economic stagnation. Heads of state from Africa made this one of their resounding messages during the recent summit on "Financing African Economies" held in Paris in May.

Infrastructure-both physical (roads, electricity) and social (health, education)-is one area where the private sector could be more involved. Africa's infrastructure development needs are huge-in the order of 20 percent of GDP on average by the end of the decade. How can this be financed? All else equal, the main source of financing would be more tax revenue collections, something that most countries are working towards. But, given the scale of the needs, new financing sources will have to be mobilized from the international community and the private sector.

Africa is a continent that holds immense opportunity for private investors. It has a young and growing population and abundant natural resources. Cities are seeing massive growth. Many countries have launched long-term industrialization and digitalization initiatives. But significant investment and innovation are necessary to unlock the region's full potential. Recent research published by IMF staff shows that the private sector could, by the end of the decade, bring additional annual financing equivalent to 3 percent of sub-Saharan Africa's GDP for physical and social infrastructure. This represents about $50 billion per year (using 2020 GDP) and almost a quarter of the average private investment ratio in the region (currently 13 percent of GDP).
What constrains private finance now?
At the moment, the private sector is not involved much in financing and delivering infrastructure in Africa, compared to other regions. Public entities, such as national governments and state-owned enterprises, carry out 95 percent of infrastructure projects. The volume of infrastructure projects with private sector participation has significantly declined in the past decade, following the commodity price bust. The limited role of private investors is also apparent from an international comparison perspective: Africa attracts only 2 percent of global flows of foreign direct investment. And when investment does go to Africa, it is predominantly to natural resources and extractive industries, not health, roads, or water.

To attract private investors and transform the way Africa finances its development, improvements in the business environment seem critical. Our research shows that three key risks dominate international investors' minds:

Project risk. Despite Africa presenting a wealth of business opportunities, the pipeline of projects that are truly "investment-ready" remains limited. These are projects sufficiently developed to appeal to investors that do not want to invest in early-stage concepts or unfamiliar markets. Financial and technical support by donors and development banks can help countries fund feasibility studies, project design and other preparatory activities that expand the pool of bankable projects.

Currency risk. Imagine that a project yields a return of 10 percent a year, but the currency depreciates by 5 percent at the same time-this would eliminate half of the profits for foreign investors. No wonder currency risk is a top concern for them. Prudent macroeconomic policy combined with sound foreign exchange reserve management can greatly reduce currency volatility.

Exit risk. No investor will enter a country if they don't have assurances that they can also exit by selling their stakes in a project and recouping their gains. Narrow and underdeveloped financial markets may prevent investors from exiting by issuing shares. Capital controls can slow down or increase the cost of exiting. And, when the legal framework is weak, investors may get bogged down in legal battles to have their rights recognized.

Incentivizing private investment
Improving the business climate is important but not enough. Development sectors have certain structural features that make private sector participation intrinsically complicated, even in the most favorable environments. For instance, infrastructure projects often have large upfront costs, but their returns accrue over long periods of time, which can be difficult for private investors to assess. Private sector growth also thrives on networks and value chains, which may not yet exist in new markets.

When these problems are acute, governments may have to provide extra incentives to make infrastructure projects attractive to private investors. These incentives, which comprise various types of subsidies and guarantees, can be costly and carry fiscal risks. But the truth is, many projects in development sectors won't happen without them. In East Asia, 90 percent of infrastructure projects with private participation receive government support.

With certain design features, governments can maximize the efficiency and impact of public incentives, while minimizing risks. Support should be targeted, temporary, and granted on the basis of proven market dysfunctions. It should also be transparent, leave sufficient risk to private parties, and display additionality, meaning that incentives should make worthy projects happen that would not happen otherwise. Finally, their size should be well calibrated to avoid overcompensating the private sector.

Given the limited availability of public funds, African countries and development partners could consider reallocating some resources used for public investment towards financing public incentives for private projects. When this reallocation is gradual and supported by sound institutions, transparency and governance, it could increase the amount, range, and quality of services for people in Africa. More innovative thinking can help realize the transformative potential of infrastructure on the continent.

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How to Attract Private Finance to Africa's Development

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By Luc Eyraud, Catherine Pattillo, and Abebe Aemro Selassie 中文, Français, Português African economies are at a pivotal juncture. The COVID-19 pandemic has brought economic activity to a standstill. Africa's hard-won economic gains of the last two decades, critical in improving living standards, could be reversed.

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https://blogs.imf.org/2021/02/18/public-and-private-money-can-coexist-in-the-digital-age/

This is a very interesting article with a lot of ideas.

1) Monetary system - a system by which a government provides money in a country's economy.

Example: Today’s world is characterized by a dual monetary system, involving privately-issued money - by banks of all types, telecom companies, or specialized payment providers - built upon a foundation of publicly-issued money - by central banks.

2) Digitalized cash - means of payment that exists in a purely electronic form.

Example: If digitalized cash—called central bank digital currency—does emerge, will it displace privately-issued money, or allow it to flourish?

3) Framework - a set of decision rules that align everyone to the financial objectives of the solution and guides the economic decision-making process.

Example: The two can coincide and complement each other, for example, to the extent central banks make certain design choices and refresh their regulatory frameworks.

Etymology: structure for enclosing or supporting," from frame (n.) + work (n.). Figurative sense "adjusted arrangement" is from 1816.

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By Tobias Adrian and Tommaso Mancini-Griffoli

We value innovation and diversity-including in money. In the same day, we might pay by swiping a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins, though in many countries increasingly less often.

Today's world is characterized by a dual monetary system, involving privately-issued money-by banks of all types, telecom companies, or specialized payment providers-built upon a foundation of publicly-issued money-by central banks. While not perfect, this system offers significant advantages, including: innovation and product diversity, mostly provided by the private sector, and stability and efficiency, ensured by the public sector.

These objectives-innovation and diversity on the one hand, and stability and efficiency on the other-are related. More of one usually means less of the other. A tradeoff exists, and countries-central banks especially-have to navigate it. How much of the private sector to rely upon, versus how much to innovate themselves? Much depends on preferences, available technology, and the efficiency of regulation.

So it is natural, when a new technology emerges, to ask how today's dual monetary system will evolve. If digitalized cash-called central bank digital currency-does emerge, will it displace privately-issued money, or allow it to flourish? The first is always possible, by way of more stringent regulation. We argue that the second remains possible, by extending the logic of today's dual monetary system. Importantly, central banks should not face a choice between either offering central bank digital currency, or encouraging the private sector to provide its own digital variant. The two can coincide and complement each other, for example, to the extent central banks make certain design choices and refresh their regulatory frameworks.
Public-private coexistence
It may be puzzling to consider that privately- and publicly-issued monies have coexisted throughout history. Why hasn't the more innovative, convenient, user-friendly, and adaptable private money taken over entirely?

The answer lies in a fundamental symbiotic relationship: the option to redeem private money into perfectly safe and liquid public money, be it notes and coins, or central bank reserves held by selected banks.

The private monies that can be redeemed at a fixed face value into central bank currency become a stable store of value. Ten dollars in a bank account can be exchanged into a ten-dollar bill accepted as legal tender to settle debts. The example may seem obvious, but it hides complex underpinnings: sound regulation and supervision, government backstops such as deposit insurance and lender last resort, as well as partial or full backing in central bank reserves.

Moreover, privately-issued money becomes an efficient means of payment to the extent it can be redeemed into central bank currency. Anne's 10 dollars in Bank A can be transferred to Bob's Bank B because they are redeemed into central bank currency in between-an asset both banks trust, hold, and can exchange. As a result, this privately-issued money becomes interoperable. And so it spurs competition-since Anne and Bob can hold money in different banks and still pay each other-and thus innovation and diversity of actual forms of money.

In short, the option of redemption into central bank currency is essential for stability, interoperability, innovation, and diversity of privately-issued money, be it a bank account or other. A system with just private money would be far too risky. And one with just central bank currency could miss out on important innovations. Each form of money builds on the other to deliver today's dual money system-a balance that has served us well.
Central bank currency in the digital age will face pressures
And tomorrow, as we step squarely into the digital age, what will become of this system? Will the digital currencies issued by central banks be so enticing that they overshadow privately-issued money? Or will they still allow for private sector innovation? Much depends on each central bank's ability and willingness to consistently and significantly innovate. Keeping pace with technological change, rapidly evolving user needs, and private sector innovation is no easy feat.

Central bank digital currencies are akin to both a smart-phone and its operating system. At a basic level, they are a settlement technology allowing money to be stored and transferred, much like bits sent between a phone's processor, memory, and camera. At another level, they are a form of money, with specific functionality and appearance, much like an operating system.

Central banks would thus have to become more like Apple or Microsoft in order to keep central bank digital currencies on the frontier of technology and in the wallets of users as the predominant and preferred form of digital money.

Innovation in the digital age is orders of magnitude more complex and rapid than updating security features on paper notes. For instance, central bank digital currencies may initially be managed from a central database, though might migrate to distributed ledgers (synchronized registries held and updated automatically across a network) as technology matures, and one ledger may quickly yield to another following major advancements. Phones and operating systems too benefit from major new releases at least yearly.

In addition, user needs and expectations are likely to evolve much more quickly and unpredictably in the digital age. Information and assets may migrate to distributed ledgers, and require money on the same network to be monetized. Money may be transferred in entirely new ways, including automatically by chips imbedded in everyday products. These needs may require new features of money and thus frequent architectural redesigns, and diversity. Today's, or even tomorrow's, money is unlikely to meet the needs of the day after.

Pressures will come from the supply-side too. The private sector will continue innovating. New eMoney and stablecoin schemes will emerge. As demand for these products grows, regulators will strive to contain risks. And the question will inevitably arise: how will these forms of money interact with the digital currencies issued by central banks? Will they exist separately, or will some be integrated into a dual monetary system where the private and central bank offerings build on each other?
A partnership with the private sector remains possible
Keeping with the pace of change of technology, user needs, and private-sector competition will be challenging for central banks. However, they need not be alone in doing so.

First, a central bank digital currency may be designed to encourage the private sector to innovate on top of it, much like app designers bring enticing functionality to phones and their operating systems. By accessing an open set of commands ("application programming interfaces"), a thriving developer community could expand the usability of central bank digital currencies beyond offering plain e-wallet services. For instance, they could make it easy to automate payments, so that a shipment of goods is paid once received, or they could build a look-up function so money can be sent to a friend on the basis of her phone number alone. The trick will be vetting these add-on services so they are perfectly safe.

Second, some central banks may even allow other forms of digital money to co-exist-much like parallel operating systems-while leveraging the settlement functionality and stability of central bank digital currencies. This would open the door to faster innovation and product choice. For instance, one digital currency might compromise on settlement speed to allow users greater control over payment automation.

Would this new form of digital money be a stable store of value? Yes, if it were redeemable into central bank currency (digital or non-digital) at a fixed face value. This would be possible if it were fully backed by central bank currency.

And would this form of digital money be an efficient means of payment? Yes again, as settlement would be immediate on any given digital money network-just as it is between accounts of the same bank. And networks would be interoperable to the extent a payment from Anne's digital money provider to Bob's would be settled with a corresponding move of central bank currency, just as in today's dual system.

This form of digital money (which we have called synthetic currency in the past) could well co-exist with central bank digital currency. It would require a licensing arrangement and set of regulations to fulfill public policy objectives including operational resilience, consumer protection, market conduct and contestability, data privacy, and even prudential stability. At the same time, financial integrity could be ensured via digital identities and complementary data policies. Partnering with central banks requires a high degree of regulatory compliance.
A system for the ages
If and when countries move ahead with central bank digital currencies, they should consider how to leverage the private sector. Today's dual-monetary system can be extended to the digital age. Central bank currency-along with regulation, supervision, and oversight-will continue to be essential to anchor stability and efficiency of the payment system. And privately-issued money can supplement this foundation with innovation and diversity-perhaps even more so than today. Where central banks decide to end up on the continuum between private-sector and public-sector involvement in the provision of money will vary by country, and ultimately depend on preferences, technology, and the efficiency of regulation.

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Public and Private Money Can Coexist in the Digital Age

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By Tobias Adrian and Tommaso Mancini-Griffoli عربي, 中文, Español, Français, 日本語, Português, Русский We value innovation and diversity-including in money. In the same day, we might pay by swiping a card, waving a phone, or clicking a mouse. Or we might hand over notes and coins,

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There is a list of new words and phrases from the attached article that I didn’t know before I read it.

1. In the aftermath of – as a result of, afterwards, consequently.

Example sentence: The establishment of the United Nation in the aftermath of the Second World War marked a turning point in the history of international relations.

2.  Salient – most important and easy to notice.

Salient – notable, striking, prominent and significant.

Example sentence: The salient findings of the 2008 audit are included in this report.

This word comes from a Latin word “salientem” (nominative “saliens”) meaning “leaping”.

3.  To ratchet up – to increase, or make something increase, repeatedly and by small amounts.

To ratchet up – to boost, to enhance.

Example sentence: Market-driven adjustments are not necessarily gradual, nor do markets only ratchet up the cost of borrowing once healthy growth returns—indeed, just the opposite seems plausible.

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By Marcos Chamon and Jonathan D. Ostry

Many countries are experiencing a combination of high public debt and low interest rates. This was already the case in advanced economies even prior to the pandemic but has become even starker in its aftermath. A growing number of emerging market and developing economies are likewise enjoying a period of negative real rates-the interest rate minus inflation-on government debt. The IMF has called on countries to spend as much as they can to protect the vulnerable and limit long-lasting damage to economies, stressing the need for spending to be well targeted. This is especially critical in emerging market and developing economies, which face tighter constraints and associated fiscal risks, where greater prioritization of spending is of the essence.

But what should eventually be done about the high levels of public debt in the aftermath of this crisis? In an earlier paper we showed that, provided fiscal space remains ample, countries should not run larger budget surpluses to bring down the debt, but should instead allow growth to bring down debt-to-GDP ratios organically. More recently, the IMF has stressed the need to rethink fiscal anchors-rules and frameworks-to take account of historically low interest rates. Some have suggested that borrowing costs-even if they move up-will do so only gradually, leaving time to contend with any fallout.

Two issues seem salient. First, will borrowing remain cheap for the entire horizon relevant for fiscal planning? Since that horizon seems to be the indefinite future, our answer here would be "no." While some have argued that permanently negative growth-adjusted interest rates might be a reasonable baseline, we would highlight the risks around such a benign future. History gives numerous episodes of abrupt upticks in borrowing costs once market expectations shift. This risk is especially relevant for emerging market and developing economies where debt ratios are already high. At some point, debts may well need to be rolled over at higher rates. Limits to how much can be borrowed have not disappeared, and the need to stay well clear of them is even sharper in a world where interest rates and growth are uncertain.

Second, will it suffice to respond gradually to higher interest rates? Our answer again is "no." Theory and history suggest that, when investors begin to worry that fiscal space may run out, they penalize countries quickly. Market-driven adjustments are not necessarily gradual, nor do markets only ratchet up the cost of borrowing once healthy growth returns-indeed, just the opposite seems plausible.

There are deeply engrained market expectations of negative interest-growth differentials (where real interest rates are less than growth rates) for most advanced economies. While long-term rates in the United States have been rising for the past several months, they remain low even by post-2008 standards. The chart below compares the Consensus Forecast for growth in the G7 economies with the real interest rate (10-year bond yield minus inflation) in 2030. The forecasts imply growth rates well in excess of real interest rates for all G7 countries except Italy.

But on the flipside, debt is getting closer to levels that were previously considered dangerous. Earlier we estimated debt limits beyond which the fiscal balance would not be able to adjust to market-driven increases in risk premia. These model-based estimates, built on a methodology later adopted by rating agencies in their own forecasts, reflect market conditions after the Global Financial Crisis but prior to COVID-19. Nevertheless, they are still informative by conveying what was perceived to be the debt limit as of a decade ago. This provides an indication of what could be expected if those previous conditions resurfaced. The bar chart shows how much of the estimated fiscal space (debt limit minus 2007 debt) was used from 2007 to 2019 (blue bars), and how much is projected to be used from 2019 to 2025 (orange bars). For some countries, the remaining fiscal space would not allow a response of a size comparable to what was deployed following the Global Financial Crisis or COVID-19-potentially constraining action in the event of another major shock.

At the risk of over-simplifying, we can consider three alternative views:

Interest rates remain low in advanced economies even if debt continues to increase. In such a case, there is no need to worry about debt or steady (non-accelerating) deficits. The debt ratio would continue to rise but will eventually stabilize at a higher level.

Interest rates are low at given debt levels, but they would not remain low if debt were to rise significantly. Most G7 countries can run a primary deficit close to 2 percent of GDP while still stabilizing their debt ratios. In this scenario, they do enjoy a free lunch provided deficits remain below the debt (ratio)-stabilizing level.

Interest rates are low but could adjust, perhaps abruptly. In this scenario, there is a case for taking advantage of favorable conditions to reduce debt and rebuild buffers. Even if the perceived risk is small, the large costs associated with forced adjustment could justify worrying about high debt and planning already for a riskier future.

What's the moral of the story? It is indeed self-defeating to target a higher budgetary balance when the pandemic is not behind us. But that does not mean we should not worry about the consequences for debt paths, not least because markets may eventually worry, even if low borrowing costs now suggest those worries are far away. A prudent baseline is that borrowing costs might become significantly higher, especially for emerging market and developing economies. Then the task is to determine the fiscal policy needed to anchor expectations for a riskier future. Advanced economies with ample space may not need to worry much, but those with very high debt-where the reasons for low borrowing costs are imperfectly understood-might need to take some anchoring insurance. Emerging market and developing economies are likely to face more binding fiscal constraints and may need to adjust sooner (but again, not before the recovery is firmed up). All countries will need to anchor fiscal plans with some notion of sustainability, which can also attenuate the concern of a market repricing of risk. This is not tomorrow's worry if fiscal space is uncertain and market expectations can turn abruptly. Laying out plans to anchor expectations should be today's worry for all.

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A Future with High Public Debt: Low-for-Long Is Not Low Forever

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By Marcos Chamon and Jonathan D. Ostry Many countries are experiencing a combination of high public debt and low interest rates. This was already the case in advanced economies even prior to the pandemic but has become even starker in its aftermath.

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https://blogs.imf.org/2021/05/10/how-stock-markets-respond-to-social-unrest/

I found an interesting article about the stock market and its today’s problems. Even if you’re not interested in this area, it would still be quite useful to look through it.

Here is the list of words I didn’t know before:

1.     Negligible - something, which is not very important and not worth to be considered. For example: «Social unrest events have a negligible impact on stock market returns»

2.     Reconcile - to become in a good relationship after a quarrel, to resume friendship. For example: «The question was, how to reconcile those two requirements»

3.     Mitigate - to make something less severe or strict, to make the situation less harmful. For example: «The judge mitigated the sentence for the accused»

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Philip Barrett and Sophia Chen

What happens to stock markets when social unrest-such as mass protests and riots-occurs? Are investors scared-off by the disorder? Or are they buoyed by the prospect of positive, popular change in response to unrest?

Our chart of the week, drawn from our recent IMF staff working paper, uses a new dataset of 156 social unrest events during 2011-20 to shed some light on these questions. It shows that in countries with more open and democratic institutions, social unrest events have a negligible impact on stock market returns (blue line). But in countries with more authoritarian regimes, the effect is large and negative: on average, stock market returns fall by 2 percent within 3 days, and by about 4 percent in the following month (black line).

These findings are consistent with real-world examples. For instance, stock markets in France-a country with strong and open institutions-were largely unmoved in the days after the Yellow Vest protests began in late 2018.

Of course, differences across countries could occur for many reasons other than political institutions. So, we also check that this relationship holds after accounting for other factors that might be correlated with the degree of institutional authoritarianism, including the severity of unrest and the country's income level.

To dig deeper into what sort of institutions might be important, the paper runs further experiments using the six measures of social and political institutions that form the World Bank Governance Indicators. Of these, two factors play a crucial role in mitigating negative stock market reactions to social unrest events: popular participation in government, and the ability of the government to regulate markets in ways that promote private sector development.

What sort of investor behavior might explain these patterns?

One clue comes from the volume of shares traded, which increases sharply following a severe unrest event. As more trades occur when investors disagree on the value of an asset, a higher trading volume typically reflects more uncertainty over the outlook. This result suggests that social unrest affects stock market returns through an indirect information channel rather than via direct disruption to economic activity.

Together, these results imply that in countries with high standards of governance, social unrest does not lead to more disagreement and uncertainty about future economic performance. This perhaps reflects the ability of more open institutions to reconcile divergent opinions and find compromises.

In contrast, this flexibility may be missing in more authoritarian systems. There, institutions may be less able to adapt to social problems, meaning that unrest can lead to rising fears of further uncertainty and deter investors.

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How Stock Markets Respond to Social Unrest

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Philip Barrett and Sophia Chen What happens to stock markets when social unrest-such as mass protests and riots-occurs? Are investors scared-off by the disorder? Or are they buoyed by the prospect of positive, popular change in response to unrest?

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Fedor Krivenok. China set to open new stock exchange in Beijing

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Fedor Krivenok. China set to open new stock exchange in Beijing

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Lately I'm really interested in stocks and everything related to this topic.

1. Scrutiny - critical observation or examination

Synonyms: Going-over, look-see, once-over

Example: The announcement comes as Chinese companies have been under increasingly close scrutiny, by both Beijing and Washington.

2. Crackdown - severe measures to restrict or discourage undesirable or illegal people or behavior
Synonyms: Repression, suppression

Example: Last week, Chinese electric car maker BYD's had to suspend a plan to sell shares in its computer chip making unit, making it the latest share offering to be hit by Beijing's crackdown on businesses.

3. Swathe - a large part of something that includes several different things

Example: Along with a huge swathe of tough new measures imposed on companies Chinese authorities have intensified their oversight...

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While President Xi did not elaborate on the plan, the China Securities Regulatory Commission (CSRC) published a statement shortly after his speech that said its leadership was "excited" at the prospect.

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China set to open new stock exchange in Beijing

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While President Xi did not elaborate on the plan, the China Securities Regulatory Commission (CSRC) published a statement shortly after his speech that said its leadership was "excited" at the prospect.

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From this significant article we can borrow some economic terms, that we will later use in our speech.

1) Allocation - an amount of a resource assigned to a particular recipient
Example: We need to determine the best way to allocate our resources.

2) External debt  - the portion of a country's debt that is borrowed from foreign lenders
Example: India's external debt rises to $570 billion in March

3) to emerge -  become apparent or prominent
Example: Eventually the truth emerged.

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The largest allocation of Special Drawing Rights, or SDRs, in history-about $650 billion-came into effect earlier this week. The allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat this unprecedented crisis.

The SDR allocation will provide additional liquidity to the global economic system-supplementing countries' foreign exchange reserves and reducing their reliance on more expensive domestic or external debt. Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.

SDRs are being distributed to countries in proportion to their quota shares in the IMF. This means about $275 billion is going to emerging and developing countries, of which low-income countries will receive about $21 billion-equivalent to as much as 6 percent of GDP in some cases.

Read more about the historic allocation and how many of the IMF's poorest member countries can benefit.

And listen to the podcast by Ceyla Pazarbasioglu, head of the Strategy, Policy and Review Department at the IMF, where she explains why the SDR allocation will go a long way toward helping vulnerable countries.

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A Shot in the Arm-How Special Drawing Rights Can Help Struggling Countries

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By IMFBlog The largest allocation of Special Drawing Rights, or SDRs, in history-about $650 billion-came into effect earlier this week. The allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat this unprecedented crisis.

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https://blogs.imf.org/2020/04/14/covid-19-crisis-poses-threat-to-financial-stability/

I found interesting article about COVID-19 and how the pandemic affected the economy

1-st word:
volatility-the quality or state of being likely to change suddenly, especially by becoming worse

Price volatility should not affect consumer bills

2-nd word:
deteriorate-tobecome worse

As the company's financial outlook deteriorated, several directors resigned.

3-rd word
financial distress-term in corporate finance used to indicate a condition when promises tocreditors of a company are broken or honored with dificalty.

We can chart the fluctuating political impact of various forces : religious dissent, royal financial distress, parliamentary, and electoral conflict.

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By Tobias Adrian and Fabio Natalucci

The COVID-19 pandemic has caused an unprecedented human and health crisis. The measures necessary to contain the virus have triggered an economic downturn. At this point, there is great uncertainty about its severity and length. The latest Global Financial Stability Report shows that the financial system has already felt a dramatic impact, and a further intensification of the crisis could affect global financial stability.

Since the pandemic's outbreak, prices of risk assets have fallen sharply. At the worst point of the recent selloff, risk assets suffered half or more of the declines they experienced in 2008 and 2009. For example, many equity markets-in economies large and small-have endured declines of 30 percent or more at the trough. Credit spreads have jumped, especially for lower-rated firms. Signs of stress have also emerged in major short-term funding markets, including the global market for U.S. dollars.
Market strain
Volatility has spiked, in some cases to levels last seen during the global financial crisis, amid the uncertainty about the economic impact of the pandemic. With the spike in volatility, market liquidity has deteriorated significantly, including in markets traditionally seen as deep, like the U.S. Treasury market, contributing to abrupt asset price moves.

To preserve the stability of the global financial system and support the global economy, central banks across the globe have been the first line of defense. First, they have significantly eased monetary policy by cutting policy rates-in the case of advanced economies to historic lows. And half of the central banks in emerging markets and lower income countries have also cut policy rates. The effects of rate cuts will be reinforced through central banks' guidance about the future path of monetary policy and expanded asset purchase programs.

Second, central banks have provided additional liquidity to the financial system, including through open market operations.

Third, a number of central banks have agreed to enhance the provision of U.S. dollar liquidity through swap line arrangements.

And finally, central banks have reactivated programs used during the global financial crisis as well as launched a range of new broad-based programs, including to purchase riskier assets such as corporate bonds. By effectively stepping in as "buyers of last resort" in these markets and helping contain upward pressures on the cost of credit, central banks are ensuring that households and firms continue to have access to credit at an affordable price.

To date, central banks have announced plans to expand their provision of liquidity-including through loans and asset purchases-by at least $6 trillion and have indicated a readiness to do more if conditions warrant.

As a result of these actions aimed at containing the fallout from the pandemic, investor sentiment has stabilized in recent weeks. Strains in some markets have abated somewhat and risk asset prices have recovered a portion of their earlier declines. Sentiment continues to be fragile, however, and global financial conditions remain much tighter compared to the beginning of the year.

All in all, the sharp tightening of global financial conditions since the COVID-19 outbreak-together with the dramatic deterioration in the economic outlook has shifted the one-year-ahead distribution of global growth massively to the left. This points to a significant increase in downside risks to growth and financial stability. There is now a 5 percent likelihood (an event that happens once every 20 years) that global growth will fall below -7.4 percent. For comparison, this threshold was above 2.6 percent in October 2019.

As so often happens at times of financial distress, emerging markets risk bearing the heaviest burden. In fact, emerging markets have experienced the sharpest portfolio flow reversal on record-about $100 billion or 0.4 percent of their GDP-posing stark challenges to more vulnerable countries.

The global spread of COVID-19 may require the imposition of tougher and longer-lasting containment measures-actions that may lead to a further tightening of global financial conditions should they result in a more severe and prolonged downturn. Such a tightening may, in turn, expose financial vulnerabilities that have built in recent years in the environment of extremely low interest rates. This would further exacerbate the COVID-19 shock. For example, asset managers facing large outflows may be forced to sell into falling markets-thus intensifying downward price moves. In addition, levered investors may face further margin calls and may be forced to unwind their portfolios; such financial deleveraging may aggravate selling pressures.

As firms become distressed and default rates climb higher, credit markets may come to a sudden stop, especially in risky segments like high yield, leveraged loan, and private debt markets. These markets have expanded rapidly since the global financial crisis, reaching $9 trillion globally, while borrowers' credit quality, underwriting standards, and investor protections have weakened. Since early March, high-yield spreads have skyrocketed notwithstanding recent declines, particularly in the sectors most affected by the pandemic like air travel and energy. Similarly, leveraged loan prices have fallen sharply-about half the drop seen during the global financial crisis at one point. As a result, ratings agencies have revised upward their speculative-grade default forecasts to recessionary levels, and market-implied defaults have also risen sharply.

Banks have more capital and liquidity than in the past, and they have been subject to stress tests and greater supervisory scrutiny in recent years, putting them in a better position than at the onset of the global financial crisis. In addition, the substantial and coordinated action by central banks to provide liquidity to banks in many economies should also help alleviate potential liquidity strains.

Nonetheless, the resilience of banks may be tested in the face of a sharp slowdown in economic activity that may turn out to be more severe and lengthy than currently anticipated.

Indeed, the large declines in bank equity prices since mid-January suggest that investors are concerned about profitability and prospects for the banking sector. For example, measures of bank capitalization based on market prices are now worse than during the 2008 global financial crisis in many countries. The concern is that banks and other financial intermediaries may act as an amplifier should the crisis deepen further.
Looking ahead
Central banks will remain crucial to safeguarding the stability of global financial markets and maintaining the flow of credit to the economy. But this crisis is not simply about liquidity. It is primarily about solvency-at a time when large segments of the global economy have come to a complete stop. As a result, fiscal policy has a vital role to play.

Together, monetary, fiscal, and financial policies should aim to cushion the impact of the COVID-19 shock and to ensure a steady, sustainable recovery once the pandemic is under control. Close, continuous international coordination will be essential to support vulnerable countries, to restore market confidence, and to contain financial stability risks. The IMF is ready to assert the full weight of its resources-first, to help protect the world's most vulnerable economies, and, for the long term, to strengthen the eventual recovery.

You can listen to the Podcast on the Global Financial Stability Amid Covid-19 Pandemic, by Fabio Natalucci here:

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COVID-19 Crisis Poses Threat to Financial Stability

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By Tobias Adrian and Fabio Natalucci The COVID-19 pandemic has caused an unprecedented human and health crisis. The measures necessary to contain the virus have triggered an economic downturn. At this point, there is great uncertainty about its severity and length.

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https://www.imf.org/en/News/Articles/2021/06/21/na062121-5-things-to-know-about-thailands-economy-and-covid-19

The article sited above shows the situation relevant to the current state of economy from an interesting perspective.

Some of the words/concepts mentioned there are:

1.     Stringent (measures)

-        “Severe/extremely limiting” measures (source: dictionary.cambridge.org)

-        Measures involving “very little money being available for spending as a result of certain regulations” (source: dictionary.cambridge.org)

-        Adj. stringent originated from Latin stringentem — present participle of stringere “to compress, contract, bind or draw tight” (source: online etymology dictionary etymonline.com)

Example:

-The government had to adhere to these stringent measures due to the urgency of the situation.

2.     Juncture

-        “A particular point in time or stage in a series of events”(source: dictionary.cambridge.org)

-        N. juncture originated from Latin iunctura – smth. that is joined together (source: online etymology dictionary etymonline.com)

Example:

-At this particular juncture we were unable to find any solutions to the stated problem.

3.     Fiscal expansion

-        “An increase in economic spending owing to actions taken by the government” (source: archive.unescwa.org)

-        Adj. fiscal originated from Latin fiscalis — smth. Belonging to the state treasury (source: online etymology dictionary etymonline.com)

-        N.expansion originated from Latin expandere — to spread out, unfold, expand (source: online etymology dictionary etymonline.com)

Example:

-Lately the economy has been going through continuous fiscal expansion.

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Five Things to Know About Thailand's Economy and COVID-19

Like many countries, Thailand's economy was hit hard by the COVID-19 pandemic last year. The country's GDP fell by over 6 percent in 2020 and many workers, especially those related to the tourism sector, lost their jobs.
This was despite decisive action on the government's part to implement a package of fiscal, monetary, and financial policies to mitigate the impact of the virus on the country. According to the IMF's latest annual assessment or Article IV consultation, Thailand's economy is forecast to grow at 2.6 percent in 2021, and a surge in COVID‑19 infections in the country and the region since the beginning of the year highlights the uncertainty about the path of the pandemic and the importance of continued efforts to contain the spread of the virus for a strong and durable recovery.
Here are five things to know about Thailand's recent economic challenges and prospects for the recovery:

The pandemic precipitated a sudden stop in tourism flows and a significant contraction in economic activity. Thailand's GDP fell by 6.1 percent in 2020, the largest contraction since the Asian financial crisis. The tourism sector, which accounts for about a fifth of GDP and 20 percent of employment, has been especially affected by the cessation of tourist travel. Low-skilled workers and informal and migrant workers have been hit hard, particularly women and the youth, who have suffered disproportionately from diminished employment opportunities in contact-intensive sectors bearing a significant burden of the layoffs observed in 2020. The financial sector has thus far weathered the pandemic well, but stress has been building up in the small and medium enterprises sector.

The government responded boldly to mitigate the crisis. Timely and stringent containment measures introduced by the authorities successfully flattened the infection curve during most of 2020. Effective containment, along with a timely and multipronged policy package-comprising fiscal stimulus amounting to about 10 percent of GDP; cuts in the policy rate by 75 basis points to its all time low of 0.5 percent, and financial sector measures to buttress the smooth functioning of financial markets and support debtors affected by COVID 19-helped limit the impact. The fiscal support has included health-related spending and assistance to affected households, including those outside the social security system financed by some reprioritization in the fiscal year 2020 budget and an additional borrowing of 1 trillion baht. These measures have saved lives and livelihoods and in part supported an initial recovery by restoring confidence and permitting a pathway to a safe and gradual reopening of activity. However, the fiscal deficit widened to 4.8 percent of GDP in 2020 and public debt-to-GDP ratio increased to 49.6 percent of GDP in 2020 from 41 percent in 2019.

Dark clouds persist and require flexibility in government policies to build back better and stronger. Economic recovery in 2021 is expected to be sluggish, with growth projected at 2.6 percent in the recently completed 2021 Article IV consultation, and divergent across sectors. Prospects for a near-term recovery are challenged by an aggressive third wave of the pandemic. This environment calls for flexibility and careful coordination among the fiscal, monetary and financial sector policies to adapt to fast changing circumstances. Most important to a resilient recovery at this juncture is the vaccine policy. Accelerating and ensuring adequate distribution of vaccines is critical to attain herd immunity, put an end to the pandemic and lay the groundwork for a strong recovery.

Mutually reinforcing policies are needed to support the recovery with fiscal policy at the center of the policy response. A premature withdrawal of the support measures would not be prudent before a recovery is well underway. To help accelerate the recovery, a more ambitious fiscal expansion is warranted with spending focused on scaling up of public investment and protecting the vulnerable, including through better targeted social transfers. As the crisis subsides and the recovery strengthens, Thailand will need to initiate a medium-term revenue mobilization strategy to rebuild fiscal buffers and ensure fiscal sustainability. Rebuilding fiscal buffers after the pandemic will require additional effort in both revenue generation and expenditure prioritization. Targeted and more effective financial sector support to hard hit firms and households, complemented with additional monetary accommodation, would also support the recovery.

Thailand's dependence on contact-intensive sectors and long-standing structural issues, such as high informality-evident before the pandemic-warrant a strong push to adapt the economy to the post-pandemic world. Further scaling up of investment, particularly for digital infrastructure, combined with improving training and education outcomes and promoting innovation will catalyze the economy's digital transformation and mitigate the possible long‑term economic damage from the pandemic. The authorities see the crisis as an opportunity to transform the tourism sector from mass and low‑cost to high‑end and low-density tourism, while encouraging domestic tourism, to reduce the sector's dependence on tourism‑related infrastructure and natural resources. To facilitate a safe reopening for the tourism sector, Thailand added tourism employees as essential workers in the vaccination queue and plans to reopen to international tourists from July 1, under the "Phuket Sandbox" initiative, allowing free movement of fully vaccinated tourists on the island. The COVID‑19 crisis also offers an opportunity to better align development policies with climate objectives to strengthen the recovery and economic resilience, and place Thailand on a firm path to meeting climate mitigation goals. An efficient carbon pricing would encourage a gradual shift to cleaner energy alternatives, reduce greenhouse gas emissions and air pollution, and help in transitioning to a decarbonized economy.

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Five Things to Know About Thailand's Economy and COVID-19

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Like many countries, Thailand's economy was hit hard by the COVID-19 pandemic last year. The country's GDP fell by over 6 percent in 2020 and many workers, especially those related to the tourism sector, lost their jobs.

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https://www.imf.org/en/News/Articles/2021/06/16/sp061721-bigtech-in-financial-services
This article focuses on the implementation of big tech into financial services. Here is a list of words that I didn’t know from this article.
1. Conglomerate-a combination of multiple business entities operating in entirely different industries under one corporate group.
Example sentence: Yandex is a conglomerate. It operates in various markets, for example: Yandex taxi, Yandex food, Yandex maps etc
2. Comprehensive- complete and including everything that is necessary
Example sentence: I have prepared a comprehensive report for the class
3 Robust-strong and unlikely to break or fail.
Example sentence: The US has one of the most robust economies in the world

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BigTech in Financial Services

It's a pleasure to join you here today, and to explore with you some of the key regulatory challenges that are now posed by BigTech.

At the IMF, as we discuss potential regulatory approaches that can be helpful in addressing risks, we need to keep in mind the nuanced circumstances of different jurisdictions in our membership.

The Challenges of BigTech

There is no doubt technology is having a profound impact on the financial services industry globally.

When we think of BigTech, we think of large technology conglomerates with extensive customer networks with core businesses in social media, telecommunications, internet search and e-commerce. They are present in all continents and in most - if not all - of our member jurisdictions.

The business model of BigTechs leverages three factors: the data they already have on consumers, aiding BigTechs to understand customer needs better; the advanced analytics they use to deepen this understanding further; and the reliance on strong networks effects, from leveraging their large consumer base. Their expansion into financial services can happen very quickly, as network effects drive interaction, user activity and the generation of ever greater amounts of data.

It is interesting to see that BigTech expansion into financial services happens in a different direction than what we would normally see in fintech start-ups. The new technologies that allowed fintech start-ups to unbundle financial services, offering partial financial services or aggregation and customer interface services, are used by BigTech to "reverse" the unbundling. Based on their large global user base of non-financial products, they benefit from cross-subsidization and economies of scale and scope. That makes them well positioned to capture a significant market share of financial services once they start providing them.

There are some potential benefits in this "rebundling". BigTechs can use their knowledge of consumer preferences obtained through their other business areas, such as consumer spending habits and credit worthiness, to offer financial services to customers who may be underserved by traditional lenders. The economic and social benefits of financial deepening can be compelling.

So, why should financial regulators be concerned with BigTech?

The provision of cloud services is a good example of how BigTech non-financial services could have broader implications. The cloud is the virtual delivery of computing services that powers the operations of diverse entities across all financial services. These range from the largest bank to investment managers and smallest start-ups.

The range is wide, yet there is a strong dependency on only a few critical providers. The Bank of England, in a 2020 survey, estimated that more than 70 percent of banks and 80 percent of insurers rely on just two cloud providers for IaaS (Infrastructure as a service). [2] Globally, 52 percent of cloud services are provided by just two BigTech entities, while more than two-thirds of services are provided by four BigTechs.[3]

This concentration highlights the reliance of the financial sector on the services provided by BigTech. Ultimately, failure of even one of these firms, or failure of a service could create a significant event in financial services, with a negative impact on markets, consumers, and financial stability. The importance of these services means that in some respects, BigTechs may be already 'too-critical-to-fail' in some.

Fintech firms in general are not yet systemically significant, because their market share of financial services in most jurisdictions is not yet material. But BigTech creates different regulatory challenges. The Financial Stability Board (FSB), in its reports on the potential financial stability implications of BigTech, [4] discussed that BigTech could potentially affect financial stability in three ways: (1) even if their isolated financial activities might not be systemic, they could but cumulatively generate significant financial risk, especially because these could be scaled-up very rapidly, (2) risks could be magnified by their interlinkages with regulated financial entities, such as partnerships to originate and distribute financial products, and (2) they could generate risks as they carry out a systemically important activity ancillary to financial services, such as cloud services.

These characteristics bring very particular challenges to regulators.

The regulators' response to these potential risks varies, depending not only on the actual business of the BigTechs in a given country, but also on the institutional architecture and mandates of regulators.

In the example of the non-financial service mentioned before, some jurisdictions seek to mitigate the excessive concentration of cloud service providers by imposing requirements through their regulated entities. For other jurisdictions, however, applying and enforcing existing outsourcing and third-party providers regulations to cloud services can be very difficult. The FSB's report on the financial-stability implications of cloud services emphasizes the issue of "lock-in risk," as well as risks related to data governance and access. [5]

Similarly, other existing regulatory frameworks which would generally be applicable to BigTech focus on their financial activities and seek to regulate them directly or through regulated entities. However, while the principle of "same activity, same risk, same regulations" may seem a reasonable approach, it may not be sufficient in addressing the potential stability implications of BigTech .

Financial services offered by BigTechs may be subject to some activity-based regulations, but BigTechs themselves are not normally subject to comprehensive group regulations or oversight. This could provide BigTechs with a competitive advantage - not through innovation and better products, but through the benefit they can gain from a less comprehensive regulatory framework. In that case, the "same activity, same risk" approach can create an uneven playing field between financial incumbents and BigTechs, and can create room for arbitrage. Many existing regulatory frameworks (like Open Banking), that aim to facilitate competition, may have unintended consequences. They could create a one-way flow of data that allows BigTechs to capture a larger market share.

BigTechs also defy the fragmented international regulatory framework applicable to data governance, operational resilience, and group-wide risks. There is plenty of room for regulatory arbitrage, policy gaps and a build-up of financial stability risks across borders.

The regulatory response to BigTech expansion in financial services is not an easy one. Much depends on the role of BigTech within a jurisdiction and on the institutional architecture for regulation in each country. But the international community needs to ensure that BigTech's potential benefits are matched by regulatory protections and mitigation against new risks.

We're all just beginning our journey to understanding the impact of BigTech on financial services. But let me share some initial thoughts - and a path we're aiming to explore.

Regulating entities, regulating activities

Within the international regulatory community, discussions on the challenges for regulation are under way in several fora. In addition to the work of the FSB, other standard-setters are reviewing their existing standards and guidelines to understand how they can be applicable to BigTech. The underlying framework for sectoral regulation, however, may simply not work in this case. The underlying framework for sectoral regulation, however, may simply not work in this case. The BIS and FSI [6] have recently re-ignited the discussion on activity vs entity-based regulations and their adequacy to deal with BigTechs. I would like to explore these ideas a little further.

Consider the entity-based approach - in which regulations are applied to licensed entities, or to groups that engage in regulated activities. Requirements are imposed at the entity level and may include governance, prudential and conduct requirements. The entity-based approach can be built on principle-based regulations that allow more flexibility, as it can rely on expectations of governance and risk management of the entities and groups. Most important: There is a continuous engagement between supervised firms and supervisors, allow for the monitoring of the buildup of risks and the evolution of business models. Implementation is supported by supervisory activities (such as off-site monitoring and on-site inspections). Supervisors usually have a range of early steps that can be taken to modify firms' behavior that could lead to excessive risk-taking and instability.

By comparison, consider the activity-based approach - in which regulations are applied to any entity (or individual) that engages in certain regulated activities. Those regulations are typically used for market conduct purposes. They are generally prescriptive, and compliance is ensured by fines and other enforcement actions. Most BigTech firms are already subject to such activity-based regulations in many countries, such as AML/CFT and consumer protection rules.

In some ways, the activity-based approach may encourage competition by requiring that only relevant regulatory permissions are needed to carry out certain activities. In theory, this "levels the playing field" by applying the same rules to the same activities, whoever is doing them. However, there are some important caveats. The approach must define activities very precisely, which is likely to create regulatory arbitrage opportunities, as it may not be able to capture rapidly changing and hard to define fintech activities. There is less room for supervisors to take actions before proceeding to enforcement. Because of this heavy reliance on enforcement, the activity-based approach is generally not suitable for early supervisory action to modify risky behavior. It is also not very effective for cross-border activities, unless global regulators adopt consistent regulations and unless international agreements allow for cross-country enforcement actions.

Therefore, where firms have a potentially systemic approach and have a business model that involves various inter-related risks, a more hybrid type of regulation makes sense. Since our Global Financial Stability Report of 2014, [7] the IMF has advocated for a mixed approachto address systemic risks posed by shadow banking. There are some similarities in the regulatory challenges between those from shadow banking and BigTech. For example, both have grown outside the regulatory perimeters to have potential systemic implications. While each individual entity and service may not pose systemic issues, the combination of the entities and services, provided as bank-like financial services, also creates systemic risks. Some entities and functions of both shadow banking and the BigTech ecosystem can easily relocate their headquarters and main activities to other jurisdictions where regulations are less robust.

So, since 2014, we have been recommending that monitoring and risk identification should focus primarily on economic functions andactivities - but that regulation and supervision should focus on entities. A mixed approachcould be based on the entity-based approach, but the requirements would be tailored to the activities that the specific entity or group is engaging in. No two BigTechs, after all, are the same. As in the entity-based approach, entities may be subject to licensing and other requirements. Supervisors would thus have a number of supervisory tools to monitor risk and, ultimately, to implement and enforce the requirements.

In the ideal world, if BigTechs are identified as systemic, it is more likely that home supervisors will need an entity-based approach. There may be a bespoke regulatory framework for BigTechs. Depending on the country and the BigTech, perhaps the principal regulator would not be the financial regulator. Whatever the regulatory agency is, it should work in close partnership with sectoral regulators, and agencies that oversee data, privacy, competition, consumer protection and financial integrity. International cooperation and information-sharing arrangements would be needed address the many cross-border aspects of BigTech.

In this less-than-ideal world, however, we observe that the combination of the activities-based approach and the entity-based approach seems to be linked to the position of jurisdictions as "home" or "host" authorities; the characteristics of the business of each BigTech in each jurisdiction; and the existing powers and mandate of supervisors.

For example, when we look at the evolution of China's approach to BigTech, and to the developments in Europe, we see that the Chinese authorities, as home supervisors of BigTech, are gradually moving to an entity-based approach - which brings BigTech into the supervisory perimeter within a framework applicable to financial conglomerates. In the EU, on the other hand, we can observe a "host" jurisdiction stance, taking steps to mitigate the risks that arise from BigTech's presence within financial markets. The Digital Services Act and Digital Markets Act contain targeted powers to leverage against platform providers and online gatekeepers, which would cover many BigTech entities. Both acts include measures to mitigate abusive market practices, improving disclosures and provisions around complaints handling, mitigating risks from combing end-user data from different sources without consent, no self-preferencing, data portability, and interoperability of ancillary services.

Realism and Pragmatism

When we look at the IMF's broad and diverse membership, however, we can see that not all home jurisdictions will have the breadth of mandate to rein in BigTech, as the Chinese authorities are doing. And not all host jurisdictions will have the (economic and political) leverage to apply requirements to foreign BigTechs, as the EU is doing.

In the longer-term, the regulatory framework, in practice, will need to consider the role of home and host jurisdictions in the regulation of BigTech - although it may be challenging to identify the home supervisor, in some cases

We think most "host" jurisdictions could consider activity-based regulations, supplemented by group-wide supervision, tailored to a BigTech's entity-specific risks. This can probably be built within their existing regulatory frameworks and can be implemented with fewer additional resources. Depending on the circumstances, supplementary group supervision can help impose prudential requirements across a BigTech group's financial activity.

Again, for such an approach to work successfully, the optimal architecture would depend on home supervisors implementing robust regulations. In this sense, we are not very optimistic on what can be achieved in the very short term.

Realistically, the biggest challenge for home supervisors would probably be the designation of BigTech as systemically important groups. Nonbank Systemically Important Financial Institution ("SIFI") designation (to large asset managers and insurers) has become stranded by strong industry pushback. It may take substantial time to enact any designation (which may be necessary for a home supervisor to implement entity-based regulations in some countries) of BigTech as systemically important entities or infrastructure.

So, being pragmatic, we have been discussing, with some of our members, what could be done as a short-term fix. For many countries, what can be done in the short term - in addition to applying activity-based regulations to the extent possible - is to engage with BigTech firms to better understand their activities in the country. Encouraging the development of codes of conduct and disclosure requirements - akin to those applicable to securities markets - can be particularly helpful. They could help identify and monitor risks; help improve governance and oversight; and help regulators build understanding using minimum resources.

Easier Said Than Done

In 2018, along with the World Bank, the IMF jointly developed the Bali Fintech Agenda to provide a framework for jurisdictions to harness the benefits of financial innovation, while mitigating the risks. It provides a framework for authorities to consider their approach to fintech. Since then, we have seen that - when it comes to BigTech - this is much easier said than done.

The rapid expansion of BigTech into financial services is happening on a cross-border and a cross-sectoral basis. Such expansion is significant in some emerging economies, where it may be creating significant risks, including to financial stability. But it also affects advanced economies in various ways, including the intensification of concentration risk.

To achieve effective implementation, and the multiple objectives of regulatory authorities, we believe a mix of entity- and activity-based approaches - probably based on a home/host supervisor split - is the way forward in the longer term.

The mixed approach would thus need to rely on a robust entity-based regulatory framework implemented by the home regulator. We recognize, however, that (in practice) it is likely to take several years before this can be achieved.

In the meantime, we think most countries, as host supervisors, will do what is possible: They should actively use all of their existing regulatory powers - such as indirect supervision through regulated entities; activity-based regulations when feasible; and the development of codes of conduct and disclosure to pave the way to a better understanding of business models and risks.

In this sense, we welcome the G7's call for further discussions on ways to mitigate the risk of regulatory fragmentation and to facilitate coherency of emerging technology ecosystems. We look forward to policies to promote international consistency in Big Tech operations across borders. These efforts would be helpful to address the concerns of our broader membership.

This is a wide-ranging and complex area for the future of effective financial regulation - with enormous implications for financial stability. If we approach these concerns with flexibility - tailoring our approaches realistically to what is achievable in the short run, as well as what is ideal for the long run - we can help create an effective, evolving approach to regulation and supervision.

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It's a pleasure to join you here today, and to explore with you some of the key regulatory challenges that are now posed by BigTech. At the IMF, as we discuss potential regulatory approaches that can be helpful in addressing risks, we need to keep in mind the nuanced circumstances of different jurisdictions in our membership.

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How climate changes can start a financial crisis. (Eugene Shcherbinin, 11th group)

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How climate changes can start a financial crisis. (Eugene Shcherbinin, 11th group)

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That article eliminates the main ways, in which financial firms can be affected by climate change. And the big risk is actually in government policies in that sphere. It was also interesting to me to read about stress tests, I didn't think about it before that paper.

Worst-case scenario — is the idea, that you should prepare for the hardest disasters that could be. Example: We should include the worst-case scenario in our research.

Rosy — optimistic, expressive. (I think the Russian analog is "pink eyeglasses"). Example: I think you shouldn't be too rosy now.

Swings — in the context of the article — fluctuation in the value of an asset. Example: We can see swings in Bitcoin's price.

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I N RECENT YEARS regulators have begun warning about the threat that climate change poses to the stability of the financial system. Following its strategy review in July, the European Central Bank ( ECB) will assemble a "climate change action plan". Mark Carney, the former governor of the Bank of England, warned of financial risks from climate change as long ago as 2015. In America the Commodity Futures Trading Commission last year published a 200-page report beginning "Climate change poses a major risk to the stability of the US financial system." But progressive Democratic politicians are calling on President Joe Biden not to reappoint Jerome Powell as the chairman of the Federal Reserve, partly because they think he has done too little to eliminate climate risk.

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Just how damaging does climate risk stand to be, though? Early stress tests by central banks and disclosures of companies are starting to shed light on the question. For the most part, the evidence that it could bring down the financial system is underwhelming. But a lot hangs on whether governments set out a clear path for reducing emissions, such as through carbon taxes and energy-efficiency standards, giving banks enough time to prepare.

Climate change can affect the financial system in three ways. The first is through what regulators describe as "transition risks". These are most likely to arise if governments pursue tougher climate policies. If they do, the economy restructures: capital moves away from dirty sectors and towards cleaner ones. Companies in polluting industries may default on loans or bonds; their share prices may collapse.

The second channel is financial firms' exposure to the hazards of rising temperatures. Attributing individual natural disasters to climate change is tricky, but the Financial Stability Board, a group of regulators, estimates that global economic losses resulting from weather-related catastrophes went from $214bn in the 1980s, in 2019 prices, to $1.62trn in the 2010s, roughly trebling as a share of global GDP. These losses are often borne by insurers (though over time the costs should be passed on to customers through higher premiums).

The financial system could also be exposed to any wider economic damage caused by climate change, say if it triggered swings in asset prices. This third channel is harder to quantify. Academic estimates of the effect of 3°C of warming (relative to pre-industrial temperatures) veer from financial losses of around 2% to 25% of world GDP, according to the Network for Greening the Financial System, a group of supervisors. Even the gloomiest estimate might prove too rosy if climate change triggers conflicts or mass migrations.

Perhaps the worst-case scenario for the financial system is where transition risks crystallise very suddenly and cause wider economic damage. In 2015 Mr Carney described a possible "Minsky moment", named after Hyman Minsky, an economist, in which investors' expectations about future climate policies adjust sharply, causing fire sales of assets and a widespread repricing of risk. That could spill over into higher borrowing costs.

The value of financial assets exposed to transition risk is potentially very large. According to Carbon Tracker, a climate think-tank, around $18trn of global equities, $8trn of bonds and perhaps $30trn of unlisted debt are linked to high-emitting sectors of the economy. That compares with the $1trn market for collateralised debt obligations ( CDO s) in 2007, which were at the heart of the global financial crisis. The impact of losses, however, would depend on who owns the assets. Regulators might be especially concerned about the exposures of large, "systemically important" banks and insurers, for instance.

Preliminary stress tests conducted by central banks suggest that the impact of climate change on these sorts of institutions might be manageable. In April the Banque de France ( Bd F) released the results from such an exercise. It found that French banks' exposures to transition risks were low. Claims on insurers, though, did rise as a result of worse droughts and flooding, by more than five times in some regions.

In a recent paper the ECB and the European Systemic Risk Board found similar results. The exposures of euro-area banks and insurers to the highest-emitting sectors were "limited", although losses in a "hot-house world" scenario where temperatures rise by 3.5°C compared with pre-industrial times were more severe. Still, in both cases, banks' losses on their corporate loan books were only around half the level of those in the regular stress tests of euro-area lenders, which they were deemed to be well-capitalised enough to pass.

Those findings are consistent with an exercise by the Dutch central bank ( DNB) in 2018, which found that the impact on Dutch financial firms from transition risks was "manageable". In its most severe scenario there was a sudden change in climate policy alongside rapid progress in renewable energy development, causing a "double shock" for companies and a severe recession. Even then, banks' capital ratios fell by about four percentage points. That is sizeable, but still less than what the banks experienced in this year's regular stress tests by the European Banking Authority, which they were deemed to pass.

To what extent are these stress tests realistic? Mark Campanale of Carbon Tracker is sceptical, pointing out that most firms are using out-of-date models. If auditors were ever to stress companies' assets against a much lower oil price, the associated write-downs could trigger a collapse in investor sentiment of the sort regulators fear, he claims. Nor do the stress tests include a full-blown Minsky crisis.

Yet in other respects they are conservative. Most of the tests used an accelerated time frame-five years in the DNB and Bd F cases-in effect assuming that firms are stuck with the balance-sheets they have today. But it seems reasonable to think that banks and insurers will change their business models as the climate transition progresses, curbing the impact on the financial system. The Bd F ran a second exercise where firms were allowed to make realistic changes to their business models over 30 years. Unsurprisingly, that allowed banks to sharply reduce lending to fossil-fuel sectors, and insurers to raise premiums.

Nonetheless, the stress tests reveal the importance of giving firms time to adapt. And that makes a predictable path for government policy important. The Bd F found that credit losses were highest when policy was delayed and there was a sudden transition. Perhaps the most plausible scenario in which climate change affects financial stability is one in which governments dawdle, and then have no choice but to take drastic action in the future. ■
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This article appeared in the Finance & economics section of the print edition under the headline "Hot take"

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Could climate change trigger a financial crisis?

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I N RECENT YEARS regulators have begun warning about the threat that climate change poses to the stability of the financial system. Following its strategy review in July, the European Central Bank ( ECB) will assemble a "climate change action plan".

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This article illustrates the consequences of the covid-19 and tells us what impact pandemic had on the Global Current Account Balances.

Here are some words I found quite interesting:

1) Fluctuate - change frequently, continuously; vary irregularly.

Example: The price of aluminium fluctuates daily.

Etymology: from Latin fluctuatus, past participle of fluctuare "to undulate", from fluctus "a wave, a flowing".

2) Monetary policy - the macroeconomic policy aimed at achieving or maintaining full employment, a high rate of economic growth, and stabilizing prices and wages.

Example: Monetary policy is still used as a means of controlling a national economy’s cyclical fluctuations.

3) Fiscal expansion - a government policy, that includes tax cuts, transfer payments and increased government spending.

Example: Fiscal expansion that depends on government spending can lead to a budget deficit.

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By Martin Kaufman and Daniel Leigh

2020 was a year of extremes. Travel all but ceased for a period. Oil prices wildly fluctuated. Trade in medical products reached new heights. Household spending shifted to consumer goods rather than services and savings ballooned as people stayed home amid a global shutdown.
If not for the crisis, global current account balances would have continued to decline.
Exceptional policy support prevented a global economic depression, even as the pandemic took a heavy toll on lives and livelihoods. The global reaction, as seen in major shifts in travel, consumption, and trade, also made the world a more economically imbalanced place as reflected in current account balances-a record of a country's transactions with the rest of the world.

In our latest External Sector Report we found that the global reaction to the pandemic further widened global current account balances-the sum of absolute deficits and surpluses among all countries-from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world.

If not for the crisis, global current account balances would have continued to decline. While external deficits and surpluses are not necessarily a cause for concern, excessive imbalances-larger than warranted by the economy's fundamentals and appropriate economic policies-can have destabilizing effects on economies by fueling trade tensions and increasing the likelihood of disruptive asset price adjustments.
A year like no other
The dramatic fluctuations in current account deficits and surpluses in 2020 were driven by four major pandemic-fueled trends:

Travel declined: The pandemic led to a sharp decrease in tourism and travel. This had a significant negative impact on the account balances of countries that rely on tourism revenue, such as Spain, Thailand, Turkey, and even larger consequences for smaller tourism-dependent economies.

Oil demand collapsed: The collapse in oil demand and energy prices was relatively short lived, with oil prices recovering in the second half of 2020. However, oil-exporting economies, such as Saudi Arabia and Russia, saw current account balances decline sharply in 2020. Oil-importing countries saw corresponding increases to their oil trade balances.

Medical products trade boomed: Demand surged by about 30 percent for medical supplies critical for fighting the pandemic, such as personal protective equipment, as well as the inputs and materials to make them, with implications for importers and exporters of these items.

Household consumption shifted: As people were forced to stay home, households shifted their consumption away from services toward consumer goods. This happened most in advanced economies where there was an increase in the purchase of durable goods like electrical appliances used to accommodate teleworking and virtual learning.

All of these factors contributed to some countries seeing a wider current account deficit, meaning they bought more than they sold, or a larger current account surplus, meaning they sold more than they bought. Favorable global financial conditions, with the unprecedented monetary policy support from major central banks, made it easier for countries to finance wider current account deficits. In contrast, during past crises where financial conditions sharply tightened, running current account deficits was harder, pushing countries further into recession.

On top of these external factors, the pandemic led to massive government borrowing to finance health care and provide economic support to households and firms, creating large uneven effects on trade balances.
The outlook
Global current account balances are set to widen even further in 2021 but this trend is not expected to last. The latest IMF staff forecasts indicate that global current account balances will narrow in the coming years, as China's surplus and the US' deficit falls, reaching 2.5 percent of world GDP by 2026.

A reduction in balances could be delayed if large deficit economies like the US undertake additional fiscal expansions or there is a faster-than-expected fiscal adjustment in current account surplus countries, like Germany. A resurgence of the pandemic and a tightening of global financial conditions that disrupt the flow of capital to emerging markets and developing economies could also affect balances.

Despite the shock of the crisis and possibly due to its worldwide impact, excessive current account deficits and surpluses were broadly unchanged in 2020, representing about 1.2 percent of world GDP. Most of the drivers of excess external imbalances pre-date the pandemic and include fiscal imbalances as well as structural and competitiveness distortions.
Rebalancing the world economy
Ending the pandemic for everyone in the world is the only way to ensure a global economic recovery that prevents further divergence. This will require a global effort to help countries secure financing for vaccinations and maintain healthcare.

A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on world growth without raising global balances.

Governments should step up efforts to resolve trade and technology tensions and modernize international taxation. A top priority should be the phasing out of tariff and non-tariff barriers, especially on medical products.

Countries with excess current account deficits should, where appropriate, seek to reduce budget deficits over the medium term and make competitiveness-raising reforms, including in education and innovation policies. In economies with excess current account surpluses and remaining fiscal space, policies should support the recovery and medium-term growth, including through greater public investment.

In the years to come, countries will need to simultaneously rebalance, while ensuring that the recovery is built on a solid and durable foundation.

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How the Pandemic Widened Global Current Account Balances

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By Martin Kaufman and Daniel Leigh عربي, 中文, Español, Français, 日本語, Português, Русский 2020 was a year of extremes. Travel all but ceased for a period. Oil prices wildly fluctuated. Trade in medical products reached new heights. Household spending shifted to consumer goods rather than services and

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I found an excellent article about the formation of the monetary system in the form that we are seeing now.

1) Monetary system — a system by which a government provides money in a country's economy.

Example: the banking capital and monetary system of Russia are not effective owing to weakness of ruble and not convertibility of national currency.

2) “gold window” — the gold window was an informal name for a two-tiered system of gold pricing.

Example: In 1973, with the oil embargo and the closing of the gold window, that was the end of America.

3) Spillover — an unexpected consequence or repercussion.

Example: meanwhile, the persistence of financial instability in the eurozone has led to spillover effects on industrial growth in several European countries.

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By Atish Rex Ghosh

Fifty years ago, the world changed. On August 15, 1971, US President Richard Nixon slammed shut the "gold window," suspending dollar convertibility. Although it was not Nixon's intention, this act effectively marked the end of the Bretton Woods system of fixed exchange rates. But, in truth, with the rise of private cross-border capital flows, a system based on fixed exchange rates for the major currencies was no longer viable and Nixon's decision-decried at the time as an abrogation of America's international responsibilities-paved the way for the modern international monetary system.
The collapse of Bretton Woods prompted a fundamental rethink about what would give stability to the international monetary system. The Bretton Woods era
When the Bretton Woods system was established in 1944, the prevailing narrative was that competitive devaluations, exchange restrictions, and trade barriers had worsened, if not caused, the Great Depression. Accordingly, IMF member countries would only be allowed to alter their exchange rate parity in cases of "fundamental disequilibrium"-the thinking being that stability of individual exchange rates (ruling out competitive devaluations) would result in stability of the overall system. Importantly, however, it was only the member country that could propose a change in the parity-the IMF's sole power was to approve or not approve the proposed change.

The system incorporated elements from the previous "gold standard" system, but now, instead of currencies being tied directly to gold, countries fixed their exchange rates relative to the US dollar. In turn, the United States promised to provide gold, on demand, in exchange for dollars accruing in foreign central banks at the official price of $35 per ounce. All currencies pegged to the dollar thereby had a fixed value in terms of gold.

In an extraordinary surrender of national sovereignty for the common good, member governments undertook to maintain a fixed parity for their exchange rate against the US dollar unless they faced a "fundamental disequilibrium" in their balance of payments. The IMF would lend reserves (usually dollars) to enable central banks to maintain the parity in the face of temporary shocks to their balance of payments without "resorting to measures destructive of national or international prosperity."

The system worked reasonably well for over two decades. However, cracks emerged. Governments of deficit countries with overvalued currencies often delayed necessary devaluations for fear of the political repercussions. Meanwhile, surplus countries, which were enjoying a trade competitiveness advantage, had no incentive to revalue their currencies.

Experience during the 1960s showed that this artificial stability of individual exchange rates could delay necessary adjustment, ultimately ending in traumatic balance-of-payments crises that resulted in instability of the system, especially if one of the major economies (for instance, the United Kingdom) was involved. The rise of private capital flows meant that any whiff of a possible devaluation would send billions of dollars out of a deficit country-thus precipitating the devaluation-and into surplus countries that would struggle to contain the inflationary consequences of the capital inflows.

In the early 1970s, the United States suffered such a balance-of-payments crisis, mainly due to its lax domestic monetary and fiscal policies as it sought to finance the costs of the Vietnam War and the "Great Society" programs, together with the reluctance of the major surplus countries (notably Germany and Japan) to revalue their currencies. As the United States hemorrhaged gold reserves, Nixon decided to close the gold window. Though intended as a ploy to force surplus countries to revalue their currencies, since the dollar was the lynch pin of the system, Nixon's action effectively brought down the system.
New system, new thinking
The collapse of Bretton Woods (and its short-lived successor, the Smithsonian Agreement) prompted a fundamental rethink about what would give stability to the international monetary system.

In devising the Bretton Woods system, the presumption had been that fixing individual currencies against gold or the dollar would make the system stable. However, in the aftermath American officials argued that simply fixing the exchange rate would bring rigidity, not stability. Attempts to maintain the peg (including through exchange restrictions or capital controls) when the exchange rate grew out of line with domestic policies only resulted in costly-and ultimately futile-delays in external adjustment.

The new thinking was the stability of the system would come less from the stability of individual exchange rates per se, and more from domestic policies being directed toward domestic stability (orderly growth with low inflation), which would result in stable but not excessively rigid exchange rates, thus allowing for timely external adjustment, and hence contributing to the stability of the overall international monetary system. While countries were no longer required to declare and maintain a fixed parity for their exchange rate, to prevent possible competitive devaluations/depreciations or other currency manipulation, the IMF was charged with exercising "firm surveillance" over its members' exchange rate policies.

Subsequent experience (especially the aftermath of the 2008 global financial crisis) showed that even such domestic stability may not suffice for stability of the system when it comes to systemically important countries. More recently, countries now regularly discuss with the IMF the external spillovers from their domestic policies. And though they would never be required to alter those policies provided they are promoting their own domestic stability, they may be encouraged to consider alternative policies if those better promote stability of the system as well.
What the future may hold
The collapse of the system of fixed exchange rates shook the world in 1971. But monetary systems exist to serve the needs of mankind, and as our societies evolve, so too must our societal systems. The world in 1971 was not what it was in 1944-just as our world today bears only some resemblance to the realities of 1971. Today, fundamental transformations are accelerating the development, deployment, and adoption of digital money. Could a digital transformation of the international monetary system soon be underway? Regardless of how the system evolves, the bedrock principle that its stability will depend on international monetary cooperation, will remain.

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From the History Books: The Rethinking of the International Monetary System

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By Atish Rex Ghosh Fifty years ago, the world changed. On August 15, 1971, US President Richard Nixon slammed shut the "gold window," suspending dollar convertibility. Although it was not Nixon's intention, this act effectively marked the end of the Bretton Woods system of fixed exchange rates.

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https://blogs.imf.org/2021/04/01/giving-everyone-a-fair-shot/

Besides the fact, that this article is not too difficult to understand, the topic raised in it is very relevant in the post-pandemic world.

Here are some useful words, I’ve never seen before:

1) Vicious circle - phrase, that means “a situation, when one problem causes another one and that trouble causes the chain of many new emerging problems, making the original one impossible to solve”

Example: Social benefits do not solve the problem of poverty, but create a vicious circle of unemployment and foster reluctance to find a job

2) Cohesive - word, that means “united and working together”

Example: We need a cohesive global community to overcome the post-coronavirus global crisis and deal with the devastating consequences.

3) Vulnerable groups - phrase that means “a category of people with any limitations, health problems, financial insecurity or disability (children, pregnant women, prisoners, disabled people, drug or alcohol addicts etc.”

Example: The collapse of the pyramid scheme has dealt a severe blow to the well-being of its depositors, especially members of vulnerable groups.

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By David Amaglobeli, Vitor Gaspar, and Paolo Mauro

The COVID-19 pandemic is intensifying the vicious circle of inequality. To break this pattern and give everyone a fair shot at prosperity, governments need to improve access to basic public services-such as health care (including vaccination) and education-and strengthen redistributive policies.

For most countries, this would require raising additional revenue and improving the efficiency of spending. These reforms must be complemented by greater transparency and accountability, which can help increase overall trust in government and contribute to more cohesive societies.
COVID-19 and inequality
Inequality was a pre-existing condition that worsened COVID-19's impact. Disparities in access to basic services have contributed to uneven health outcomes. According to our research, countries with worse access to health care, proxied by the number of hospital beds, have had higher COVID-19 mortality rates than predicted by the number of cases and age structure. Similarly, our analysis shows that countries with higher relative poverty had higher rates of both cases and deaths.

And COVID-19 is also widening inequality. One example is children's education. Our analysis shows that, with widespread school closures, education losses in 2020 are estimated at a quarter of the school year in advanced economies and twice as much in emerging market and developing economies. Children from poorer families have been disproportionately affected. We estimate that up to 6 million children in emerging market and developing economies could drop out of school in 2021, with lifelong adverse consequences.

In addition, the pandemic has hit the most vulnerable groups the hardest. Lower-skilled and younger workers have experienced more job losses than those in higher-skilled occupations. Likewise, disadvantaged ethnic groups and informal sector workers have been harder hit. And women, who tend to be overrepresented in sectors most affected by COVID-19 such as hospitality and retail, have been particularly affected by the pandemic, especially in poorer countries.
A holistic approach
Breaking the cycle of inequality requires both predistributive and redistributive policies. With the former, governments ensure that people have access to basic public services and good jobs. This makes it possible to reduce income inequality before government redistributes with taxes and transfers.

Investing in education, healthcare, and early childhood development can have a powerful effect on improving access to these services and hence to lifetime opportunities. If governments increased spending on education by 1 percent of GDP, for example, they could reduce the gap in enrollment rates between the richest and the poorest families by almost one-third. In addition to increasing spending, all governments should focus on reducing spending inefficiencies, which are sizable, especially in poorer countries.

The COVID-19 crisis has demonstrated the vital importance of a good social safety net that can be quickly activated to provide lifelines to struggling families. High social spending is effective in reducing poverty only when it provides adequate assistance and covers the poorest segments of society. Developing and maintaining comprehensive social registries with a reliable citizen identification system is a good investment. These elements would ideally be complemented by effective distribution mechanisms such as e-payments and, where access to bank accounts is limited, mobile money transfers.

Enhancing access to basic public services will require additional resources, which can be mobilized, depending on country circumstances, by strengthening overall tax capacity. Many countries could rely more on property and inheritance taxes. Countries could also raise tax progressivity as some governments have room to increase top marginal personal income tax rates, whereas others could focus on eliminating loopholes in capital income taxation. Moreover, governments could consider levying temporary COVID-19 recovery contributions as supplements to personal income taxes for high-income households and modernizing corporate income taxation. In emerging market economies and low-income countries in particular, additional revenues could also be raised through consumption taxes to finance social spending. Further, low-income countries will need support from the international community to help with financing and implementing home-grown taxation and spending reforms.
Strong public support needed
Governments may want to consider developing comprehensive policy packages that promise expanded access to public services and better protection from income shocks while supporting a job-rich, inclusive recovery. In some countries, public support for better access to basic services, financed through higher taxes, has been strong and is likely increasing with the pandemic. A recent survey in the United States shows that those who had personally experienced the impact of COVID-19, either through illness or unemployment, have developed a stronger preference for more progressive taxation.

Such policies should be embedded in medium-term fiscal frameworks and complemented by actions that strengthen transparency and accountability. Meaningful gains in spending efficiency are also necessary. Experience with past pandemics shows that the stakes are high because trust in government can quickly deteriorate and contribute to greater polarization. Resolute actions by governments to deliver needed services and foster inclusive growth can counteract this trend and help build social cohesion.

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By David Amaglobeli, Vitor Gaspar, and Paolo Mauro عربي, 中文, Español, Français, 日本語, Português, Русский The COVID-19 pandemic is intensifying the vicious circle of inequality. To break this pattern and give everyone a fair shot at prosperity, governments need to improve access to basic public services-such as health

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Anton Jimenez Is Digital Money Really Money?

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Anton Jimenez Is Digital Money Really Money?

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There are many question to which we do not have the answers just yet, this is also true to the cripto currencies and their relation and manipulation by the banking system of the world. In this article there are 3 key words that one need to understand, in order to get the whole idea being transmited.

1. Currency: Is any type of medium exchange for goods and services, it comes in different forms of money, usually in paper or coins, and it is issued by the government and accepted on its value for payment.

Example: Central banks of any country have the power and authority to control the domestic currency, and depending on the power of the currency, it can influence the currency of other countries.

2. Digital Tokens: It is similar to a digital "key" that gives access to the development or participation in a "distributed ledger", "blockchain" or in any other digital data structure.

Example: In order to access the encrypted data in a Bitcoin Blockchain, one need a digital token.

3. Insolvency: In accounting, it means a state of being unable to pay debt by an individual person or a company.

Example: Banks don´t emit loans to people that lack solvency (insolvent) because they cannot pay back the credit.

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By Catalina Margulis and Arthur Rossi

Countries are moving fast toward creating digital currencies. Or, so we hear from various surveys showing an increasing number of central banks making substantial progress towards having an official digital currency.

But, in fact, close to 80 percent of the world's central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear.

To help countries make this assessment, we reviewed the central bank laws of 174 IMF members in a new IMF staff paper, and found out that only about 40 are legally allowed to issue digital currencies.
Not just a legal technicality
Any money issuance is a form of debt for the central bank, so it must have a solid basis to avoid legal, financial and reputational risks for the institutions. Ultimately, it is about ensuring that a significant and potentially contentious innovation is in line with a central bank's mandate. Otherwise, the door is opened to potential political and legal challenges.

Now, readers may be asking themselves: if issuing money is the most basic function for any central bank, why then is a digital form of money so different? The answer requires a detailed analysis of the functions and powers of each central bank, as well as the implications of different designs of digital instruments.
Building a case for digital currencies
To legally qualify as currency, a means of payment must be considered as such by the country's laws and be denominated in its official monetary unit. A currency typically enjoys legal tender status, meaning debtors can pay their obligations by transferring it to creditors.

Therefore, legal tender status is usually only given to means of payment that can be easily received and used by the majority of the population. That is why banknotes and coins are the most common form of currency.

To use digital currencies, digital infrastructure-laptops, smartphones, connectivity-must first be in place. But governments cannot impose on their citizens to have it, so granting legal tender status to a central bank digital instrument might be challenging. Without the legal tender designation, achieving full currency status could be equally challenging. Still, many means of payments widely used in advanced economies are neither legal tender nor currency (e.g., commercial book money).
Uncharted waters?
Digital currencies can take different forms. Our analysis focuses on the legal implications of the main concepts being considered by various central banks. For instance, where it would be "account-based" or "token-based." The first means digitalizing the balances currently held on accounts in a central banks' books; while the second refers to designing a new digital token not connected to the existing accounts that commercial banks hold with a central bank.

From a legal perspective, the difference is between centuries-old traditions and uncharted waters. The first model is as old as central banking itself, having been developed in the early 17 th century by the Exchange Bank of Amsterdam-considered the precursor of modern central banks. Its legal status under public and private law in most countries is well developed and understood. Digital tokens, in contrast, have a very short history and unclear legal status. Some central banks are allowed to issue any type of currency (which could include digital forms), while most (61 percent) are limited to only banknotes and coins.

Another important design feature is whether the digital currency is to be used only at the "wholesale" level, by financial institutions, or could be accessible to the general public ("retail"). Commercial banks hold accounts with their central bank, being therefore their traditional "clients." Allowing private citizens' accounts, as in retail banking, would be a tectonic shift to how central banks are organized and would require significant legal changes. Only 10 central banks in our sample would currently be allowed to do so.
A challenging endeavor
The overlapping of these and other design features can create very complex legal challenges-and could well influence the decisions made by each monetary authority.

The creation of central bank digital currencies will also raise legal issues in many other areas, including tax, property, contracts, and insolvency laws; payments systems; privacy and data protection; most fundamentally, preventing money laundering and terrorism financing. If they are to be " the next milestone in the evolution of money," central bank digital currencies need robust legal foundations that ensure smooth integration to the financial system, credibility and broad acceptance by countries' citizens and economic agents.

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Legally Speaking, is Digital Money Really Money?

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By Catalina Margulis and Arthur Rossi Countries are moving fast toward creating digital currencies. Or, so we hear from various surveys showing an increasing number of central banks making substantial progress towards having an official digital currency.

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1. Stablecoin (Etymology: stable(n.) + coin(n.)
(noun)

A cryptocurrency that is linked to a currency (for example, the US dollar) that is not subject to drastic changes in value.

Examples:
1. Stablecoin allows people to make safe and private transactions.
2. Today the stablecoin market is worth over one hundred billion dollars.

2. Expenditure (noun)
Etymology
expendere(Latin, v.) -> expeditus(Latin, p.)
->expend(English, n.)

The total amount of money that somebody spends.

Examples:
1. A person's income and expenditure should be balanced.
2.  The company's budget was reduced, so its' main focus became lowering its' expenditures.

3. Fluctuate (verb)
Etymology: fluere(Latin,v.)-> fluctus(Latin,n.)-> fluctuare(Latin,v.)-> fluctuation(English,n.)

To shift unexpectedly, rise and fall, change dramatically in amount or number.

Examples:
1. The oil prices have been fluctuating a lot in the past few years.
2. The prices for the same product tend to fluctuate depending on the seller.

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By Tobias Adrian and Rhoda Weeks-Brown

New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.

But doing so is not straightforward. It requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.

Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.

Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account. Their value can be extremely volatile. Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.

And yet, Bitcoin lives on. For some, it is an opportunity to transact anonymously-for good or bad. For others, it is a means to diversify portfolios and hold a speculative asset that can bring riches but also significant losses.

Cryptoassets are thus fundamentally different from other kinds of digital money. Central banks, for instance, are considering issuing digital currencies-digital money issued in the form of a liability of the central bank. Private companies are also pushing the frontier, with money that can be sent over mobile phones, popular in East Africa and China, and with stablecoins, whose value depends on the safety and liquidity of backing assets.
Cryptoassets as legal tender?
Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency.

If a cryptoasset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
Countries can even go further by passing laws to encourage the use of cryptoassets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases.

Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.

Even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset.

A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.

Then again, real currency may not always be readily available, nor easily transferable. Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.
Proceed with caution
The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability. If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.

Also, monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, it "imports" the credibility of the foreign monetary policy and hope to bring its economy-and interest rates-in line with the foreign business cycle. Neither of these is possible in the case of widespread cryptoasset adoption.

As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of market valuations.

Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country's financial system, fiscal balance, and relationships with foreign countries and correspondent banks.

The Financial Action Task Force has set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks. But enforcement of that standard is not yet consistent across countries, which can be problematic given the potential for cross-border activities.

Further legal issues arise. Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion. Moreover, the official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations. And changes to a country's legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.

In addition, banks and other financial institutions could be exposed to the massive fluctuations in cryptoasset prices. It is not clear whether prudential regulation against exposures to foreign currency or risky assets in banks could be upheld if Bitcoin, for instance, were given legal tender status.

Moreover, widespread cryptoasset use would undermine consumer protection. Households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks. While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer.

Finally, mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions. The ecological implications of adopting these cryptoassets as a national currency could be dire.
Striking a balance
As national currency, cryptoassets-including Bitcoin-come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut.

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Cryptoassets as National Currency? A Step Too Far

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By Tobias Adrian and Rhoda Weeks-Brown عربي, 中文, Español, Français, 日本語, Português, Русский New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers. But doing so is not straightforward.