## A Currency Revolution

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**Canonical URL:** [A Currency Revolution](https://www.imf.org/-/media/files/publications/fandd/article/2022/march/prasad.pdf)

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### Decline of cash and private digital payments
- Digital payments’ convenience makes it "highly unlikely that cash will survive much longer."
- Examples of private-sector dominance:
  - China: Alipay and WeChat Pay have "blanketed the entire Chinese economy with very low-cost digital payments."
  - Sweden: private sector is "doing an equally good job of providing very low-cost digital payments."

### Cryptocurrencies and stablecoins
- Bitcoin:
  - Has "very unstable value," limiting its usefulness as a medium of exchange for day-to-day transactions.
  - Is "somewhat slow and cumbersome to use."
- Stablecoins:
  - Aim for stability by being "backed up by stores of fiat currency, such as US dollars or euros."
  - Risks:
    - Uncertainty over whether issuers actually hold the promised liquid securities and whether those securities remain liquid during mass redemptions.
    - Potential to become conduits for illicit financing if "not closely regulated."
    - Cross-border nature of cryptocurrencies complicates unilateral regulation; "we’ll have to undertake some sort of global coordination in terms of these regulatory policies."

### Central bank digital currencies (CBDCs)
- Rationale varies by country:
  - Developing countries: "broadening financial inclusion" for people without access to digital payments or basic banking products and services.
  - Sweden: e-krona envisioned as a "backstop to the private payment infrastructure."
  - China: digital yuan seen as a "complement to the existing payment systems" that could "increase the amount of competition" against dominant private providers.
- Design considerations and risks:
  - Risk to private payment providers if government provides a "very low-cost digital payment system" that private firms cannot compete with.
  - Deposit flight risk: commercial bank deposits could be "swept away into central bank accounts," especially in troubled times.
  - Dual-tier model (experiments in China and Sweden): central bank provides the underlying CBDC infrastructure and tokens; commercial banks maintain digital wallets holding those CBDCs.

### Implications for monetary policy, financial stability, and inclusion
- Monetary policy operations and fiscal transfers:
  - If all citizens had accounts at the central bank (e.g., the Federal Reserve), it would be "a lot easier for the Fed to undertake certain operations such as stimulus payments."
  - During the pandemic, households without direct deposit details received prepaid debit cards or checks, many of which were "lost in the mail, and some of which were misappropriated or mutilated."
- Crime and tax:
  - Reduced cash use would make informal payments (e.g., to a gardener or babysitter) "much more likely" to be reported, affecting tax revenues.
  - Digital money can reduce cash usage in illicit transactions such as "drug trafficking or money laundering."
- Social and political dangers:
  - Authoritarian governments could use CBDCs "to surveil its population."
  - Even benevolent governments might use digital money to restrict uses they deem "not necessarily socially beneficial," turning money into an instrument of social policy and risking central bank credibility.

### Cross-border payments, global currencies, and emerging markets
- Friction-free international digital payments can benefit importers and exporters by easing international trade transactions.
- Risks for small and developing economies:
  - More conduits for international capital flows make it "harder ... to manage those capital flows," increasing capital flow volatility and exchange rate volatility.
  - Countries with less credible central banks or institutions risk seeing their currencies "being swept away by other currencies, either official or private, that citizens of these countries trust a lot more than their own currencies."
- Global landscape:
  - Anticipated global access to digital versions of major currencies (dollar, renminbi, etc.) and potential issuance of stablecoins by megacorporations (example: Amazon) pose competitive pressures on national currencies.
  - Currency dominance depends not only on economic size but on institutional trust factors: "the rule of law, an independent central bank, and an institutionalized system of checks and balances." In these dimensions, the US "still retains a dominance relative to much of the rest of the world."

### Policy considerations and operational responses
- Regulatory coordination:
  - Cross-border nature of cryptocurrencies and stablecoins necessitates "some sort of global coordination in terms of these regulatory policies."
- CBDC deployment choices:
  - Consider dual-tier CBDC systems where central banks supply infrastructure and tokens while private sector firms manage wallets and customer-facing services.
  - Assess country-specific user cases for CBDCs (e.g., financial inclusion needs and existing payment-system deficiencies).
- US-specific context:
  - About "5 percent of households in the US are still unbanked or underbanked."
  - The Fed’s alternative to a CBDC: "FedNow" project to increase the efficiency of retail and wholesale payments.

*Interview with Eswar Prasad, Finance & Development, March 2022.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/march/prasad.pdf_