A Proposal for SDR-based SDGs Cryptocurrency

29 Apr, 2020

The Covid-19 crisis caused a major economic slowdown worldwide. We need to mitigate the slowdown in a sustainable manner that not only provides short term stimulus, but also supports long-term growth, fairly distributed across the globe. Moreover, there are major challenges facing the financing of the Sustainable Development Goals (SDGs). This proposal aims to formulate a solution for both of these challenges.

What is the SDR?

The Special Drawing Rights (SDR) is an international reserve asset, created by the International Monetary Fund in 1969, to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The SDR serves as the unit of account of the IMF and some other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.

The SDR has been suggested as a global currency by Nobel laureate Joseph Stiglitz, among others.

The Global Financial Crisis vs. the COVID-19 Crisis

During the Global Financial Crisis, the G20 approved in April 2009 that the IMF issues the equivalent of $283 billion in SDR to be added to IMF member countries reserves according to their shares in the Fund. This allocation can play a role in providing liquidity and supplementing member countries’ official reserves.

In the current Covid-19 crisis, the Managing Director of the IMF, Kristalina Georgieva, made a statement on 23 March 2020 in which she indicated that:

Several low- and middle-income countries have asked the IMF to make an SDR allocation, as we did during the Global Financial Crisis, and we are exploring this option with our membership.

The same proposal has been advanced by other officials and economists.

Development Currency

Probably a better proposal is to have the SDR as a development currency. That is, the SDR can be injected into the capital of Multilateral Development Banks to support sustainable development of member countries. In this manner, the currency is used for objectives directly serving the SDGs rather than budget financing which tends to depress long-term development of the country. Moreover, this approach will give better treatment to developing and least developing countries, as their shares in the IMF are relatively small. Hence, their benefits from the injected SDR will be limited.

The allocation of the SDR to MDBs will be, of course, in coordination with the IMF and its shareholders. The IMF may issue two tranches of SDR: one for its shareholders (as it did during the GFC), and one for the MDBs. The SDR allocated to MDBs can be distributed in proportion to each MDB’s capital.

This is a shift from the prevailing rule that the SDR can be used only by central banks of the member countries of the IMF. However, this shift is motivated by the need to have a sustainable source of funding sustainable development. Sustainable development is a public good, and only institutions like the IMF and the MDBs can offer this good to the global economy.

It should be noted that the proposal to use SDR to support development is different from the prevalent proposals to use the SDR as a global currency or “helicopter money”. We think that restricting the new role of the SDR to target sustainable development will be of especially added value to the world economy.

SDG Smart Cryptocurrency

Another layer of improvement can be introduced using the blockchain-based crypto-asset technology. This as such is not a new idea. Former IMF Managing Director Christine Lagarde raised the possibility of launching a digital version of the SDR, dubbed “IMFCoin”. What is probably new is linking the crypto-SDR to development objectives through MDBs.

If the IMF issues crypto-SDR, the currency can be easily traced and monitored, and thus its impact can be easily evaluated. The blockchain technology and smart contracts allow for transparency and verifiability of the use of the crypto-SDR funds, which greatly enhances the proper governance of development financing.

By dedicating the crypto-SDR to development, the IMF and the MDBs will be able to issue “crypto-SDG smart currency” (or c-SDR for short): A blockchain-based currency dedicated to support the Sustainable Development Goals. Using smart contracts, the currency can be directed to serve the KPIs of the SDGs. Technology will make it possible to trace and verify the use and performance of the new currency in achieving the desired objectives.

The smart SDG cryptocurrency might be a valuable source for funding the implementation of the SDGs, given the $2.5 trillion per year SDG financing gap.

Financing Mechanism

The smart crypto-SDR can be used to support member countries through more than one mechanism. To respect the current rule of restricting the SDR to central banks (in general), the following mechanisms operate through the central bank of the member country.

  1. Central Bank Investment Deposit
    1. The MDB can place a certain amount of the c-SDR with the central bank of the MC as an investment deposit for, say, a 3-year period.
    2. The central bank will issue a national cryptocurrency (nc-currency) backed by the deposited c-SDR (according to an agreed exchange rate). The national cryptocurrency will be a form of “central bank digital currency” discussed among central bankers.
    3. These nc-currencies will be channeled to the economy through direct transfer to beneficiary groups. These groups can be designated using an objective set of criteria (e.g. age, occupation, MSMEs, etc.) to achieve the KPIs of the SDGs. 
    4. The nc-currency cannot be exchanged for foreign currencies, but it can be exchanged for ordinary national currency or the c-SDR. The restriction on the nc-currency can be easily implemented using the blockchain technology and smart contracts, further enhancing transparency and accountability in utilizing the c-SDR. The restriction serves primarily to stimulate the domestic economy instead of supporting imports of foreign commodities which may negatively impact the long-term growth. Moreover, the restriction helps keep inflation under control.
    5. A Gesell’s tax can be imposed on the nc-currency. Gesell’s tax is a hoarding tax that deducts a certain percentage of the nc-currency from the e-wallet of the users. It encourages users to spend the nc-currency and discourage hoarding or speculation. The tax will generate returns to the c-SDR investment deposit.
    6. At maturity (by the end of 3 years), if the investment deposit is not renewed, then the central bank shall return the c-SDR deposit (and replace it with other hard-currency reserves). The returns on the deposit (generated from the Gesell’s tax) need not be in c-SDR but could be in any agreed currency (e.g. US$).

  2. e-Commerce

    Another possible channel would be to support trade among MCs using the c-SDR. For this purpose, a trade (e-commerce) platform can be created to support trade among producers in MCs using the c-SDR. The exchange of local currency for the c-SDR shall be through the central bank.


In all cases, the c-SDR and the associated nc-currency will be used to support the objectives of the Sustainable Development Goals.

Conclusion

The SDR can become the currency for sustainable development using modern technologies. The G20 has the power to change the future of development financing by expanding the effective use of smart crypto-SDR to fund the achievement of the SDGs.

Acknowledgement

The author is grateful to colleagues at the Islamic Research and Training Institute and the Islamic Development Bank for helpful and fruitful discussions. The opinions presented in this Brief do not necessarily reflect the views of the Islamic Development Bank.


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