The transition to digital money is inevitable and imminent. According to the BIS, at least a fifth of the world’s population can expect an introduction to either global stablecoins (GSCs) or central bank digital currencies (CBDCs) ‘very soon’. With them will come greater financial inclusion, cross-border transaction efficiency, and an ecosystem of e-commerce/social media platforms. But there are also risks.
Two working papers by the IMF and BIS recently provided some informal insights into the macro-financial implications of digital currencies and stablecoins. Here, I distil their main findings:
The implications of digital money depends crucially on the level of adoption, which is likely to be widespread.
Conventional monetary policy is hindered even when digital currency is only used for cross-border transactions and for retail use on e-commerce and social media platforms.
Currency substitution increases with greater adoption of digital money, leading to greater financial instability, capital flow volatility and a shortage of reserve holdings.
Many of the macro-financial risks are attenuated in the long-run, but only under global adoption of both GSCs and CBDCs. Greater competition dilutes private firms influence over macroeconomic policy.
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