## insea2024001 — Executive Summary

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---

### I. Introduction
- Rapid advent of digital money and assets (DM) raises questions for the international monetary system (IMS).
- DM forms covered: Central Bank Digital Currencies (CBDCs), E-money, crypto assets such as global stablecoins (GSCs), and security and utility tokens.
- Key statistics and developments (as of October 2023 and cited sources):
  - market capitalization of crypto assets was about $1.3 trillion,
  - GSC market capitalization at about $125 billion.
  - Bank for International Settlements identified 86 central banks engaged in some form of CBDC work.
  - Atlantic Council indicates 130 countries are exploring CBDCs; Bahamas, Jamaica, and Nigeria have officially launched CBDCs; Euro System finalized CBDC investigation phase in October 2023; China, Brazil, and India are actively piloting CBDC projects.
- Geopolitical developments (for example, Russia’s war in Ukraine) may accelerate DM proliferation and geo-economic fragmentation.
- Paper focus:
  - public DM (CBDCs) and private DM backed by traditional currencies (for example, GSCs),
  - empirical analyses of payment efficiency linked to DM on international currency adoption and reserve holdings,
  - illustrative modeling scenario of a DM-induced shock for potential demand for global financial safety net (GFSN) resources.

### Box: Forms of Digital Money (taxonomy and risks)
- DM classification dimensions: issuer, denomination, convertibility/redemption, backing, technology, end users.
- Money criteria (IMF 2023): (i) reliable store of value, (ii) unit of account, (iii) medium of exchange.
- Noted failures and risks: collapse of TerraUSD in May 2022; bankruptcy of FTX in November 2022.
- CBDC cross-border use modes: single-issuer domestic/cross-border use (issuer controls scope) or interoperable multi-CBDC (mCBDC) arrangements.

### Executive summary findings
- If DM raises payment efficiency, it could be broadly adopted for cross-border payments alongside existing currencies.
- Early FPS experience suggests cost and speed efficiency gains bolster usage.
- Empirical link between payment efficiency and reserve holdings is inconclusive; large efficiency gains or disruptive forces may be required to materially change reserve configurations.
- DM adoption poses risks including bank disintermediation, currency substitution, spillovers, capital flow volatility, and implications for the GFSN.
- Modeling points to potential significant demands on GFSN resources in DM-induced shock scenarios.
- Policy implications: careful CBDC design, regulation/supervision of private DM, and enhanced global coordination across standard-setting bodies, regulators, central banks, multilateral and private-sector institutions.
- A shift to a multipolar reserve configuration could require global reserve currency issuers to expand liquidity backstops.

*Source: IMF Note NOTE/2024/001 — Executive Summary*

---

### Box 2. Efficiency Gains under Fast Payment Systems (FPS)

### Definition and recent developments
- FPS defined: transmission of payment message and availability of final funds in real time or near real time on a 24/7 basis.
- FPS uses traditional money (bank deposits) often leveraging central bank infrastructure and technological innovations.
- Rapid adoption: more than 60 jurisdictions as of 2021 (CPMI 2021).
- Domestic FPS examples: Europe (TIPS), Singapore (FAST), Thailand (PromptPay), Malaysia (Paynet).
- Cross-border linkage attempts: bilateral links (Singapore–Thailand in 2021) and project Nexus (BIS 2021b).

### Efficiency and cost comparisons (country examples preserved)
- Thailand: estimated cost of an “e-payment” is 0.46 baht per transaction vis-à-vis 1.26 baht for a cash transaction (Lamsam and others 2018).
- UK: FPS cost estimated at GBP 0.14 per transaction in 2008 and GBP 0.02 in 2014; compared with estimated costs for cash, checks, and credit transfers of USD 1.21, 2.79, and 1.95, respectively (Deloitte 2019).
- Cross-border Singapore–Thailand: costs estimated to have fallen from 15 percent to 3 percent (IMF 2022b).
- DM and DLT may lower costs further; in several jurisdictions service is free for end users.

### Adoption and usage growth
- Per-capita transaction volumes after adoption:
  - Australia: about 40 payments per capita by the end of the fourth year of adoption.
  - Sweden: more than 40 payments per capita by the sixth year of adoption.
  - Denmark: more than 60 payments per capita by the sixth year of adoption (Fitzgerald and Rush 2020; Lowe 2022).
- Rapid growth in India, Mexico, the UK, and several ASEAN countries.

### Measurement approach and empirical specification
- Proxy for efficiency: number of direct payment corridors for existing currencies.
- Rationale: more corridors increase likelihood of direct correspondent transactions, shorten linkages, and increase competition.
- Empirical approach: logit regression of country’s currency usage share; explanatory variables include payment efficiency (payment corridors), lagged currency usage, lagged partner country’s currency usage, trade share, stock market capitalization, and inflation.
- Endogeneity addressed via Bartik-type instrument: sum of growth in active routes in each currency weighted by each currency’s share in country c in the previous period.
- Baseline includes country-currency random/fixed effects (αc,i) and time-fixed effects (δt).

### Key empirical findings (explicit marginal effect)
- Positive correlation between change in number of payment corridors and currency use for payment purposes.
- Statistically significant: inertial effects, network effects, positive effects from trade linkage and financial depth, negative effect from inflation.
- Marginal effect: a unit increase in payment efficiency (that is, a doubling of the number of corridors compared with those of January 2013) could result in an increase in currency shares for payment purposes between 4 and 9 percent.

### Implications and caveats for DM and reserves
- Improvements in payment efficiency can significantly affect international adoption of currencies for trade and financial transactions.
- New payments technologies, including CBDCs, could lead to more international adoption of these forms of money, fostering digital currency areas and interconnectedness.
- Caveats: efficiency measure based on correspondent-bank relationships not direct DM usage; level of efficiency achievable by digital currencies depends on system solutions, interoperability, technology, regulatory compliance costs, and design features.
- Little evidence yet of efficiency gains for crypto assets (IMF 2023a).
- Literature inconclusive on displacement of the US dollar in the medium term; inertia in reserve shares remains key (IMF 2020b). Geo-economic fragmentation may reinforce DM-induced disruptions (Aiyar and others 2023).

*Prepared by Jakree Koosakul (SPR); Box summarizes empirical analysis and findings on FPS efficiency and implications for DM and international currency adoption.*

---

### Link between payment efficiency and reserve currency adoption

### Empirical strategy and data
- Builds on Iancu and others (2020) by adding payment efficiency (payment corridors) as explanatory variable for reserve holdings.
- Panel: 42 economies with data for some or all years from 2013 to 2018 for reserve holdings in the US dollar, euro, Japanese yen, and British pound.
- Estimators: country-currency and year fixed effects, random effects, Arellano-Bond (limitations due to small sample), and Tobit for fractional dependent variable.
- Models estimated separately for advanced economies and emerging and developing economies.
- Modeled variables include αc,i (country-currency effect), δt (time effect), Trade Sharec,I,t, FX Alignmentc,I,t, Financial Linksc,I,t, Payment corridorc,I,t.

### Empirical findings and limitations
- Main findings:
  - Large and significant inertia effects in reserve shares.
  - Financial links more important than trade links as drivers of reserve currency holdings.
  - Payment efficiency is not statistically significant under most specifications.
    - Interpretation: substantial efficiency gains (and issuer credibility) may be needed to overcome strong inertia in reserve holdings.
- Data caveats:
  - Dataset covers 2013–2018; six years of annual data only.
  - Results should be interpreted cautiously given limited time span.

---

### Digital Money, risks to the Global Financial Safety Net (GFSN), and illustrative shock scenario

### GFSN composition and scale (preserved figures)
- GFSN layers: countries’ international reserves, bilateral swap arrangements (BSAs), regional financial arrangements (RFAs), and the IMF.
- Global reserves have increased to about $14 trillion.
- Other GFSN layers amount to about $4 trillion.
- Total firepower of the GFSN cited as around $18 trillion.

### Channels of harm from foreign-issued DM adoption
- Reduced transaction costs and frictions could cause or exacerbate:
  - disintermediation and/or currency substitution (residents swap local deposits for DM or foreign-currency assets),
  - substitution of local-currency portfolio investments with DM or foreign-currency assets,
  - decline in local-currency bank deposits leading to banking and liquidity distress, reserve losses, depreciation, currency and confidence shocks,
  - avoidance of capital flow management (CFM) measures via crypto and DLT, increasing systemic implications.

### Illustrative tail scenario: model framework and assumptions
- Model: multilayered global network model with reserve dynamics ∆R_i,t and country foreign exchange reserves R_i0 at t = 0.
- Data: 2020 data for 63 countries (36 AEs, 27 EMs), representing 85 percent of global GDP, including cross-country trade, interbank claims, portfolio investment, and FDI.
- Amplification mechanisms:
  - Country risk premia sensitive to distance to default (stock of international reserves vs reserve adequacy metric).
  - Asset price co-movements and risk-premia increases calibrated using interest rate correlations and CDS shifts during stress.
- Domestic policy responses assumed:
  - Fiscal consolidation of 2 percent of GDP.
  - Depreciation of currency by 5–10 percent depending on asset-link strength to defaulting country.
- Tail scenario assumptions:
  - Vulnerable countries adopt cross-border DM issued by large/systemic economies (public CBDCs or private GSCs), triggering shifts away from domestic assets.
  - Resulting dynamics: disintermediation, capital outflows, exchange-rate pressures, bank runs, reserve losses, and, in tail case, default on cross-border obligations.

### Vulnerability identification (counts preserved)
- Methodology: IMF (2021a) indicators of external and financial vulnerability; TripleA 2021 crypto ownership data; trade/financial ties with US, Euro area, China.
- Identified vulnerabilities:
  - 32 countries vulnerable to crypto adoption,
  - 23 to financial risks,
  - 5 to external imbalances,
  - a handful vulnerable to all three.

### Model estimates (explicit figures)
- Reserve losses and demand on the GFSN (after monetary and fiscal adjustment) could be significant, up to $1.2 trillion (compared to total firepower of the GFSN of around $18 trillion).
- Estimates sensitive to model assumptions; amplification channels excluded could make consequences larger.

### Supply-side and structural responses
- CBDC issuers could provide ex ante liquidity backstops to counterparties with large CBDC holdings.
- Regional reserve issuers may customize and strengthen bilateral liquidity support to stabilize currency blocs or promote regional currency use.
- New RFAs could emerge among countries sharing common CBDCs or mCBDC arrangements; RFAs could be strengthened to support cross-border payments.
- Wider use of regional currencies could increase capacity to bolster RFAs by lending in regional currencies.
- Net effect: DM could increase demand for GFSN resources and incentivize expansion or reconfiguration of the GFSN, potentially making it larger but more uneven and fragmenting funding markets.

---

### Conclusions and preliminary policy implications

### Net balance of DM adoption
- Opportunities:
  - higher financial interconnectedness and inclusion,
  - greater diversification of risks,
  - stronger trade relationships,
  - integration of international payment systems.
- Risks:
  - increased financial instability channels (bank disintermediation, currency substitution, spillovers, capital flow volatility).

### Policy and institutional responses (recommendations preserved)
- CBDC design:
  - careful design with inclusivity and cross-border considerations to protect financial intermediation, financial stability, and CFM effectiveness.
- Regulation and supervision:
  - effective regulatory frameworks for GSCs and crypto assets to safeguard monetary sovereignty, guard against capital flow volatility, maintain CFM effectiveness, address legal risks, and implement financial integrity standards.
- Global coordination:
  - coordination among global standard-setting bodies, regulators, central banks, multilateral and private-sector institutions is critical.
  - collaboration among international financial institutions on global principles to regulate GSCs and crypto assets.
- GFSN adjustments:
  - enhanced coordination between GFSN layers; BSAs and RFAs may need expansion and upgrading (including arrangements outside DM blocks) and inclusion of precautionary instruments for DM-related risks.
  - potential multipolar reserve configuration may require global reserve currency issuers to substantially expand liquidity backstopping mechanisms to minimize disorderly switching and improve access to GFSN resources.
- IMF role:
  - continue critical role across Article IV consultations and Financial Sector Assessment Programs.
  - multilateral efforts on DM taxonomies, monitoring, risk identification, design advice, and providing platform for global dialogue.
  - capacity development to avoid a digital divide.
  - reassessment of IMF size and lending toolkit to ensure adequate resourcing to support members, including precautionary instruments, in a more DM-driven world.

*Source: insea2024001 - section identifies a link between (IMF Note NOTE/2024/001).*

### Executive Summary ___________________________________________________________ 1

### Executive Summary

### I. Introduction
- The rapid advent of digital money and assets (DM) raises questions about its implications for the functioning of the international monetary system (IMS).
- DM forms include Central Bank Digital Currencies (CBDCs), E-money, crypto assets such as global stablecoins (GSCs), and security and utility tokens.
- As of October 2023:
  - market capitalization of crypto assets was about $1.3 trillion,
  - GSC market capitalization at about $125 billion.
- The Bank for International Settlements identified 86 central banks engaged in some form of CBDC work.
- The Atlantic Council indicates that 130 countries are exploring CBDCs, among which the Bahamas, Jamaica, and Nigeria have officially launched CBDCs, the Euro System has finalized their CBDC investigation phase in October 2023, and China, Brazil, and India are actively piloting CBDC projects.
- Geopolitical developments related to Russia’s war in Ukraine may further accelerate the proliferation of DM, with geo-economic fragmentation leading some countries to seek alternative forms of reserve assets and/or different payment channels.
- The paper focuses on DM types that are either public (CBDCs) or private and backed by traditional currencies (for example, GSCs), and presents:
  - empirical analyses of the effect of payment efficiency linked to DM on international currency adoption for payment/transaction purposes and on reserve currency holdings,
  - an illustrative modeling scenario of a DM-induced shock for the potential demand for global financial safety net (GFSN) resources.

### Box: Forms of Digital Money (high-level taxonomy and risks)
- DM can be classified by:
  - issuer (private or public),
  - denomination (existing monetary unit, basket of currencies, or new unit),
  - convertibility or redemption,
  - type of backing,
  - technology (centralized/decentralized, permissioned/permissionless, token/account based),
  - end users (wholesale or retail).
- For an asset to satisfy the definition of money, it needs to be widely accepted as:
  - (i) reliable store of value,
  - (ii) unit of account,
  - (iii) medium of exchange (IMF 2023).
- Many crypto assets do not meet these three criteria and function as investment products; some stablecoins are backed by safe and liquid assets while others rely on algorithms and can be backed by crypto assets.
- Recent episodes highlighting risks:
  - collapse of TerraUSD in May 2022,
  - bankruptcy of FTX in November 2022.
- CBDC cross-border use can take different forms:
  - the same CBDC used for domestic and cross-border payments (issuer controls scope and rules),
  - interoperable multi-CBDC (mCBDC) arrangements enabling cross-border, cross-currency payments (examples of projects referenced in source).

### II. Digital Money and Cross-Border Payments
- A key motivation for DM adoption is lower transaction costs due to higher payment efficiency.
- By reducing intermediaries and enhancing openness and competition, DM has the potential to make payments cheaper, faster, and more transparent, especially across borders.
- Quantifying the impact of improvements in payment efficiency on international currency adoption for transaction purposes can inform the potential international use of DM.
- Findings summarized:
  - To the extent that DM leads to higher transaction efficiency, it could become more broadly adopted for cross-border payment purposes, alongside existing currencies.
  - Early experience with fast payment systems suggests efficiency gains in cost and speed have bolstered usage in several jurisdictions.

### III. Digital Money and International Reserves
- Potential channel from payment efficiency to reserve asset adoption:
  - Benefits from lower transaction costs and greater financial interconnectedness could spur adoption of DM as international reserve assets.
- Empirical evidence:
  - The empirical evidence linking the possible efficiency from DM with reserve holdings is inconclusive.
  - This suggests that a significant change in efficiency and payment usage or another disruptive force may need to materialize before current reserve configurations materially change.

### IV. Digital Money and the Global Financial Safety Net (GFSN)
- Risks associated with DM adoption include:
  - bank disintermediation,
  - currency substitution,
  - spillovers,
  - capital flow volatility,
  - implications for the GFSN.
- Modeling simulation results:
  - point to potential significant demands on GFSN resources in a DM-induced shock scenario.
- Policy implications for GFSN and global coordination:
  - Policymakers will need to carefully consider the appropriate design of public DM and adequate supervision and regulation of private DM.
  - Coordination among global standard-setting bodies, regulators, central banks, and multilateral and relevant private-sector institutions will be critical.
  - Enhanced coordination between GFSN layers will be key to maximizing their effectiveness in a more digitalized world.
  - A shift to a multipolar reserve configuration may require global reserve currency issuers to expand liquidity backstops to improve access to GFSN resources and minimize risks.

### V. Conclusions and Preliminary Policy Implications
- Net balance of DM adoption:
  - Opportunities: higher financial interconnectedness and inclusion, greater diversification of risks, stronger trade relationships, integration of international payment systems.
  - Risks: increased financial instability channels (bank disintermediation, currency substitution, spillovers, capital flow volatility).
- Role of the IMF:
  - The role of the IMF would continue to remain critical, although it would need to continue to adapt its surveillance, lending, and capacity development to respond to new challenges posed by DM.

*Source: IMF Note NOTE/2024/001 — Executive Summary*

### Box 2. Efficiency Gains under Fast Payment Systems

### Box 2. Efficiency Gains under Fast Payment Systems

### Definition and recent developments
- A fast payment system (FPS) is defined as one in which the transmission of the payment message and the availability of the final funds to the payee occur in real time or near real time on a 24/7 basis.
- FPS uses traditional forms of money (bank deposits) but often employs central bank infrastructure and leverages technological innovations for DM payments.
- Rapid adoption in the last decade: more than 60 jurisdictions as of 2021 (Committee on Payments and Market Infrastructure (CPMI) 2021).
- Examples of domestic FPS: Europe (TIPS), Singapore (FAST), Thailand (PromptPay), Malaysia (Paynet).
- Cross-border use more limited; recent linkage attempts include bilateral links (Singapore–Thailand in 2021) and project Nexus (BIS 2021b). Technological, regulatory, and legal challenges remain for cross-border FPS.

### Efficiency and cost comparisons
- FPS frequently noted for speed, convenience, and reduced cost for end users; costs tend to decrease over time (BIS 2021b).
- Country-specific cost examples:
  - Thailand: estimated cost of an “e-payment” is 0.46 baht per transaction vis-à-vis 1.26 baht for a cash transaction (Lamsam and others 2018).
  - UK: FPS cost estimated at GBP 0.14 per transaction in 2008 and GBP 0.02 in 2014; compared with estimated costs for cash, checks, and credit transfers of USD 1.21, 2.79, and 1.95, respectively (Deloitte 2019).
  - Cross-border Singapore–Thailand: costs estimated to have fallen from 15 percent to 3 percent (IMF 2022b).
- DM and DLT technology may be able to lower these costs further.
- In several jurisdictions the service has been made free of charge for end users.

### Adoption and usage growth
- Usage of FPSs has grown rapidly in several jurisdictions in both transaction volume and value.
- Examples of per-capita transaction volumes after adoption:
  - Australia: about 40 payments per capita by the end of the fourth year of adoption.
  - Sweden: more than 40 payments per capita by the sixth year of adoption.
  - Denmark: more than 60 payments per capita by the sixth year of adoption (Fitzgerald and Rush 2020; Lowe 2022).
- Rapid growth in value and volume also observed in India, Mexico, and the UK (CPMI 2016) and in several ASEAN countries (Khiaonarong and Humphrey 2022).

### Measurement approach: payment corridors as a proxy for efficiency
- Due to limited direct time series on DM or FPS transactions, the analysis uses the number of direct payment corridors for existing currencies transacted in the current payment system as a proxy for lower costs and higher payment efficiency.
- Rationale:
  - More corridors between banks transacting across borders in a given currency increase the probability that a transaction will occur along a direct correspondent corridor.
  - More direct bank relationships allow for shorter linkages/direct payments and increase competition between banking intermediaries, which drives down costs and fees.
- Preliminary evidence suggests remittance costs are higher when there are fewer active corresponding relationships (Rice, von Peter, and Boar 2020).
- Cross-border payments data capture financial transactions across 209 countries and 35 currencies, with monthly observations between May 2013 to December 2020.

### Empirical specification and identification
- Empirical approach: logit regression where a country’s share of currency usage is the dependent variable.
- Explanatory variables include:
  - Payment efficiency (number of payment corridors, used as proxy)
  - Lagged currency usage (inertia effect)
  - Lagged partner country’s currency usage (network effect)
  - Trade share
  - Stock market capitalization (financial depth)
  - Inflation for each currency-issuing country
- Endogeneity addressed via a Bartik-type instrumental approach: the sum of growth in active routes in each currency, weighted by each currency’s share in country c in the previous period (assumes growth of the total number of active routes relative to USD is exogenous to shares of active routes in each currency).
- Baseline empirical specification includes country-currency random/fixed effects (αc,i) and time-fixed effects (δt).

### Key empirical findings
- Positive correlation between the measure of payments efficiency (change in number of payment corridors) and currency use for payment purposes.
- Other statistically significant effects:
  - Significant inertial effect (lagged currency usage).
  - Significant network effects (lagged partner country’s currency usage).
  - Positive effects from trade linkage and financial depth (stock market capitalization).
  - Negative effect from inflation.
- Marginal effects: a unit increase in payment efficiency (that is, a doubling of the number of corridors compared with those of January 2013) could result in an increase in currency shares for payment purposes between 4 and 9 percent.

### Implications for Digital Money (DM), CBDCs, and international reserves
- Improvements in payment efficiency can significantly affect international adoption of currencies for trade and financial transactions.
- Introduction of new payments technologies such as DM, including CBDCs, could lead to more international adoption of these new forms of money, further spurring global interconnectedness.
- Literature suggests proliferation of DM usage and related technology could foster digital currency areas and increased interconnectedness (Brunnermeier, James, and Landau 2019).
- Caveats and constraints:
  - The paper’s efficiency measure is based on traditional corresponding bank relationships rather than direct data on DM usage and may miss other factors influencing DM usage.
  - The level of efficiency that digital currencies can achieve will also depend on payment systems solutions and their interoperability, underlying technology, regulatory compliance costs, and design features.
  - For crypto assets, there is little evidence yet of such efficiency gains (IMF 2023a).
- On global reserve configuration:
  - The literature does not offer a clear answer on whether DM entrants will displace the US dollar in the medium term; the US dollar’s wide dominance and the inertial nature of global reserve holdings are important considerations (Triffin 1960).
  - IMF (2020b) found inertia in reserve currency shares has remained the key driver of reserves.
  - Advances in payments technologies could lessen switching costs and weaken network effects and inertia.
  - Evidence of increasing share of nontraditional reserve currencies issued by smaller countries is attributed to active portfolio diversification amid declining transaction costs, growing liquidity of FX markets, increasing stock of reserve portfolios, and low interest rates on traditional currencies (Arslanalp and others 2022).
  - Geo-economic fragmentation can reinforce DM-induced disruptions and stimulate countries to reassess reserve portfolios to reduce dependency on the US dollar (Aiyar and others 2023).

*Prepared by Jakree Koosakul (SPR); Box summarizes empirical analysis and findings on FPS efficiency and implications for DM and international currency adoption.*

### section identifies a link between

### insea2024001 - section identifies a link between

### Link between payment efficiency and reserve currency adoption
- A simple partial analysis finds a strong and positive correlation between payment currency shares and reserve currency shares (text Figure 2), suggesting the medium-of-exchange and store-of-value roles of international currencies are correlated and that digital money (DM) could influence reserve adoption.
- The paper updates and builds on Iancu and others (2020) to test whether payment efficiency leads to increased central bank reserve currency holdings by including payment efficiency (measured via payment corridors) as an additional explanatory variable for changes in reserve holdings.
- Empirical setup details:
  - Panel of 42 economies with data available for some or all years from 2013 to 2018 for reserve holdings in the main four reserve currencies (US dollar, euro, Japanese yen, and British pound).
  - Estimators used: country-currency and year fixed effects, random effects, and the Arellano-Bond estimator (with limitations due to small sample size).
  - A Tobit model addressing the fractional nature of the dependent variable delivers qualitatively similar results.
  - Model estimated separately for advanced economies and emerging and developing economies due to different drivers and data availability.
- Key modeled variables (as specified):
  - αc,i: country-currency random/fixed effect
  - δt: time-fixed effect
  - Trade Sharec,I,t: share of country c’s trade with reserve issuer I at time t
  - FX Alignmentc,I,t: estimated exchange rate co-movement of country c with reserve currency I at time t
  - Financial Linksc,I,t: share of country c’s public debt or cross-border bank claims denominated in reserve currency I at time t
  - Payment corridorc,I,t: country c’s payment corridor in reserve currency I at time t

### Empirical findings and limitations
- Main empirical findings:
  - Large and significant inertia effects in reserve shares.
  - Importance of financial links, more than trade links, as key drivers of reserve currency holdings—consistent with Iancu and others (2020).
  - Payment efficiency is not statistically significant under most regression specifications.
    - Interpretation: large gains in efficiency (and other factors such as credibility of DM issuers) may be needed to overcome strong inertial forces driving reserve holdings.
- Data and interpretation caveats:
  - Dataset covered data starting from 2013; only six years of annual data are available (2013–18) for reserve currency shares in this paper’s dataset.
  - Results must be interpreted cautiously given data limitations (less than a decade of annual data).

### DM, risks to the Global Financial Safety Net (GFSN), and illustrative shock scenario
- GFSN composition and current scale:
  - GFSN comprises countries’ international reserves, bilateral swap arrangements (BSAs), regional financial arrangements (RFAs), and the IMF.
  - Global reserves have increased in recent years to about $14 trillion.
  - Other GFSN layers amount to about $4 trillion.
  - Total firepower of the GFSN cited as around $18 trillion.
- Channels through which foreign-issued DM adoption could harm adopters:
  - Reduced transaction costs and frictions could cause or exacerbate disintermediation and/or currency substitution (residents swapping local banking-system deposits for DM or foreign-currency assets).
  - Substitution of local-currency portfolio investments with DM or other foreign-currency assets.
  - Decline in local-currency bank deposits leading to banking and liquidity distress, reserve losses, depreciation, currency and confidence shocks, and negative feedback loops.
  - Crypto assets and access to DLT could facilitate avoidance of capital flow management (CFM) measures, further spurring financial disintermediation and systemic implications.
- Quantitative illustrative tail scenario using a multilayered global network model:
  - Model framework:
    - Each country i has foreign exchange reserves R_i0 at t = 0.
    - Change in foreign exchange reserves ∆R_i,t described by specified network expression (model incorporates trade balances, asset holdings, interest rates, nominal effective exchange rates, and external financing from GFSN layers).
    - Model uses 2020 data for 63 countries (36 AEs, 27 EMs), representing 85 percent of global GDP, with cross-country trade, interbank claims, portfolio investment, and foreign direct investment.
  - Amplification mechanisms included:
    - Country risk premia sensitive to distance to default (difference between stock of international reserves and reserve adequacy metric).
    - Asset price co-movements and increases in risk premia for similar-risk countries calibrated using interest rate correlations and CDS shifts during stress.
  - Assumed domestic policy responses under contagion:
    - Fiscal consolidation of 2 percent of GDP.
    - Depreciation of currency by 5–10 percent, depending on asset-link strength to defaulting country.
  - Illustrative tail scenario assumptions:
    - Countries with real, financial, and/or external vulnerabilities adopt cross-border forms of DM issued by large/systemic economies (public CBDCs or private GSCs), triggering shifts away from domestic assets.
    - This leads to disintermediation, capital outflows, exchange-rate pressures, bank runs, reserve losses, and, in the tail assumption, default on cross-border obligations.
  - Vulnerability identification and counts:
    - Methodology based on IMF (2021a) indicators of external and financial vulnerability.
    - Uses TripleA 2021 crypto adoption ownership data and trade/financial ties with the United States, Euro area, and China.
    - Identified vulnerabilities: 32 countries as vulnerable to crypto adoption, 23 to financial risks, and 5 to external imbalances; a handful vulnerable to all three.
  - Model estimates:
    - Reserve losses and demand on the GFSN (after monetary and fiscal adjustment) could be significant, up to $1.2 trillion (compared to total firepower of the GFSN of around $18 trillion).
    - Estimates are sensitive to model assumptions and should be interpreted with caution; amplification channels excluded from current analysis could make consequences larger.
- Supply-side responses and structural implications:
  - CBDC issuers could provide ex ante liquidity backstops to counterparties with large CBDC holdings.
  - Regional reserve issuers may customize and strengthen bilateral liquidity support to stabilize currency blocs or promote regional currency use.
  - New RFAs could emerge among countries sharing common CBDCs or mCBDC arrangements; RFAs could be strengthened to support cross-border payment functioning.
  - Wider use of regional currencies could increase capacity to bolster RFAs by lending in regional currencies.
  - Net effect: DM could both increase demand for GFSN resources and incentivize expansion or reconfiguration of GFSN, potentially making it larger but more uneven and fragmenting funding markets.

### Conclusions and preliminary policy implications
- Potential for DM to alter global currency use and reserve configuration:
  - DM adoption that increases efficiencies could lead to broader DM use for transaction purposes and eventually to increased supply of global reserve assets.
  - Positive correlation found between efficiency (an expected DM benefit) and currency usage for transaction purposes.
  - Some forms of DM (CBDCs or fully backed GSCs) could eventually emerge as new reserve assets alongside existing ones, potentially fostering diversification and broadening the supply of global safe assets; geopolitical developments may accelerate this.
- Risks if inadequately coordinated or supervised:
  - DM adoption could amplify vulnerabilities, increase currency substitution, spillovers, capital flow volatility, and lead to faster and deeper crises.
  - Official adoption of privately issued DM, especially crypto assets as legal tender, would be detrimental to macro-financial stability, financial integrity, and consumer protection.
  - DM-induced shocks could lead to material demands on the GFSN.
- Policy and institutional responses recommended:
  - Address risks through appropriate CBDC design, interoperability among CBDCs and with existing systems, regulation of private DM, and enhanced policy coordination with public and private institutions.
  - Careful CBDC design with inclusivity and cross-border considerations could help protect financial intermediation and financial stability and preserve efficiency of CFM measures when needed.
  - Effective regulatory frameworks for GSCs and crypto assets are needed to safeguard monetary sovereignty, guard against capital flow volatility, maintain CFM effectiveness, address legal risks, implement financial integrity standards, and reinforce domestic and international collaboration.
  - Coordination among global standard-setting bodies, regulators, central banks, multilateral and relevant private-sector institutions is critical; collaboration among international financial institutions on global principles is needed to regulate GSCs and crypto assets effectively.
  - Enhanced coordination between GFSN layers is increasingly vital; BSAs and RFAs may need to be expanded and upgraded (including to those outside DM blocks) and to include precautionary instruments guarding against DM-related risks.
  - A potential multipolar reserve configuration may require global reserve currency issuers to substantially expand liquidity backstopping mechanisms to minimize disorderly switching between reserve currencies and improve access to GFSN resources.
- Role of the IMF:
  - IMF’s role remains critical in a DM world across Article IV consultations (monetary, exchange rate, financial sector, fiscal, and structural areas) and Financial Sector Assessment Programs.
  - Multilateral efforts needed on DM taxonomies, monitoring trends, identifying risks, advising on design issues, and providing a platform for global dialogue and cooperation.
  - IMF can provide capacity development to help countries avoid a digital divide and ensure new solutions work for all countries.
  - Size of the IMF and its lending toolkit would need reassessment to ensure adequate resourcing to support members with financial assistance, including precautionary, in a more DM-driven world.

*Source: insea2024001 - section identifies a link between (IMF Note NOTE/2024/001).*

### References

### References

### Multi-currency and international monetary system
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- Farhi, Emmanuel, and Matteo Maggiori. 2016. “A Model of the International Monetary System.” NBER Working Paper 22295, National Bureau of Economic Research, Cambridge, MA.
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- Rey, Hélène. 2001. “International Trade and Currency Exchange.” The Review of Economic Studies 68 (2):443–64.
- Nurkse, Ragnar, and League of Nations Economic, Financial, and Transit Department. 1944. International Currency Experience: Lessons of the Interwar Period. Princeton, NJ: League of Nations.

### Central Bank Digital Currency (CBDC), digital money, and payments systems
- Adrian, Tobias, and Rhoda Weeks-Brown.  2021.  “Crypto Assets as National Currency? A Step Too Far.” IMF Blog, July 26. Washington, DC. https://www.imf.org/en/Blogs/Articles/2021/07/26/blog-cryptoassets-as-national-currency-a-step-too-far.
- Allen, Sara, Srdjan Capkun, Ittay Eyal, Giulia Fanti, Bryan Ford, James Grimmelmann, Ari Juels, et al. 2020. “Design Choices for Central Bank Digital Currency: Policy and Technical Considerations.”  Brookings Institution. July 23, 2020. https://www.brookings.edu/wp-content/uploads/2020/07/Design-Choices-for-CBDC_Final-for-web.pdf.
- Bank for International Settlements (BIS).  (2021a). “Rise of the central bank digital currencies: drivers, approaches and technologies”
- Bank for International Settlements (BIS). (2021b). “Nexus: A Blueprint for Instant Cross-Border Payments.” July.
- Bank for International Settlements (BIS). ( 2021c). “Changing Patterns of Capital Flows.” Committee on the Global Financial System Paper 66.
- Bank for International Settlements (BIS). 2022. “Project mBridge: Connecting Economies through CBDC.” October 26, 2022. https://www.bis.org/publ/othp59.htm.
- Bank for International Settlements (BIS), International Monetary Fund (IMF), and World Bank.  2021. “Central Bank Digital Currencies for Cross-Border Payments.” Report to the G20. July 2021. https://www.bis.org/publ/othp38.pdf.
- Bank for International Settlements (BIS), International Monetary Fund (IMF), and World Bank.  2022. “Options for Access to and Interoperability of CBDCs for Cross-Border Payments.” Report to the G20.
- Bank of England. 2020. “Central Bank Digital Currency: Opportunities, Challenges and Design,” Discussion Paper, 12 March 2020. [Online]. Available: https://www.bankofengland.co.uk/paper/2020/central-bank-digital-currency-opportunities-challenges and-design-discussion-paper.
- Bindseil, Ulrich. 2020. “ Tiered CBDC and the financial system”, ECB Working Paper 2351. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2351~c8c18bbd60.en.pdf, 2020.
- Board of Governors of the Federal Reserve System. 2022. “Money and Payments: The US Dollar in the Age of Digital Transformation.” Last modified June 10, 2022. https://www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm.
- Carstens, Agustín. 2019. “The Future of Money and the Payment System: What Role for Central Banks?” Lecture delivered at Princeton University,  NJ, December 5.
- Carstens, Agustín. 2021. “Digital Currencies and the Future of the Monetary System.” Remarks given at the Hoover Institution Policy Seminar, Basel, Switzerland, January 27.
- Committee on Payments and Market Infrastructures.  2016. “Fast Payments – Enhancing the Speed and Availability of Retail Payments.” November.
- Committee on Payments and Market Infrastructures.  2021. “Developments in Retail Fast Payments and Implications for RTGS Systems.” December.
- Deloitte.  2019. “Economic Impact of Real-Time Payments.” Joint Research Report with Vocalink, July. https://www2.deloitte.com/uk/en/pages/financial-services/articles/economic-impact-of-real-time-payments.html.
- Fitzgerald, Emilie, and Alexandra Rush. 2020. “Two Years of Fast Payments in Australia.” Reserve Bank of Australia, March 19, 2020. https://www.rba.gov.au/publications/bulletin/2020/mar/two-years-of-fast-payments-in-australia.html.
- Khiaonarong, Tanai, and David Humphrey.  2022. “Instant Payments: Regulatory Innovation and Payment Substitution Across Countries.” IMF Working Paper 2022/228, International Monetary Fund, Washington, DC.
- Kumhof,  Michael,  and Clare Noone. 2018. “Central Bank Digital Currencies:  Design Principles and Balance Sheet Implications.” Staff Working Paper 725, Bank of England, London.
- Lowe, Philip. 2022. “An Efficient, Competitive and Safe Payments System.” Keynote address at the Australian Payments Network Summit, Sydney, December 14.
- International Monetary Fund (IMF). 2020a. “Digital Money Across Borders: Macro-Financial Implications.” IMF Policy Paper 2020/050, Washington, DC.
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- International Monetary Fund (IMF). 2021c. “The Rise of Public and Private Digital Money: A Strategy to Continue Delivering on the IMF’s Mandate.” IMF Policy Paper 2021/055, Washington, DC.
- International Monetary Fund (IMF). 2023c. “How Should Central Banks Explore Central Bank Digital Currency?: A Dynamic Decision-Making Framework.” IMF Fintech Note 2023/008.
- International Monetary Fund (IMF). 2023b. “Capital Flow Management Measures in the Digital Age (II): Design Choices of CBDC.” IMF FinTech Note, forthcoming.
- World Economic Forum (WEF). 2021. “Digital Currency Governance Consortium White Paper Series: Compendium Report.” Cologny/Geneva, Switzerland, November.

### Reserve currencies, capital flows, financial safety nets, and regional arrangements
- Aiyar, Shekhar, Jiaqian Chen, Christian H. Ebeke, Roberto Garcia-Saltos, Tryggvi Gudmundsson, Anna Ilyina, Alvar Kangur, et al.  2023. “Geoeconomic Fragmentation and the Future of Multilateralism.” IMF Staff Discussion Note 2023/001, International Monetary Fund, Washington, DC.
- Arslanalp, S., Eichengreen, B., and Simpson-Bell, C. (2022). “The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies.” Journal of International Economics, Volume 138.
- Iancu, Alina, Seunghwan Kim, and Alexei Miksjuk. 2021. “The Global Financial Safety Net during the COVID-19 Crisis: An Interim Stock-Take.” IMF Special Series Note on COVID-19, September 15, 2021, International Monetary Fund, Washington, DC.
- Iancu, Alina, Gareth Anderson, Sakai Ando, Ethan Boswell, Andrea Gamba, Shushanik Hakobyan, et al.  2020. “Reserve Currencies in an Evolving International Monetary System.” IMF Departmental Paper 2020/002, International Monetary Fund, Washington, DC.
- International Monetary Fund (IMF). 2016a. “Adequacy of the Global Financial Safety Net.” IMF Policy Paper, Washington, DC.
- International Monetary Fund (IMF). 2017. “Collaboration between Regional Financial Arrangements and the IMF.” IMF Policy Paper, Washington, DC.
- International Monetary Fund (IMF). 2018. “Considerations on the Role of the SDR.” IMF Policy Paper, Washington, DC.
- International Monetary Fund (IMF). 2022a. “Review of the Institutional View on the Liberalization and Management of Capital Flows.” IMF Policy Paper 2022/008, Washington, DC.
- Porter, Nathan, Camilo E. Tovar Mora, Juan P. Trevino, Johannes Eugster, and Theofanis Papamichalis. 2022. “The Systemic Impact of Debt Default in a Multilayered Global Network Model.” IMF Working Paper 2022/171, International Monetary Fund, Washington, DC.

### Crypto assets, stablecoins, and regulatory policy
- International Monetary Fund (IMF). 2023a. “Elements of Effective Policies for Crypto Assets.” IMF Policy Paper 2023/004, Washington, DC.
- He, Dong, Annamaria Kokenyne, Xavier Lavayssière, Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier. 2022. “Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets.” IMF FinTech Note 2022/005, International Monetary Fund, Washington, DC.
- US Department of Treasury.  2021. “Report on Stablecoins.” President’s Working Group on financial Markets, the FDIC and the Office of the Comptroller of the Currency, Washington, DC, November.
- US Department of Treasury.  2022. “The Future of Money and Payments.” Washington, DC, September.
- International Monetary Fund (IMF). 2023d. IMF-FSB Synthesis Paper: Policies for Crypto Assets
- Adrian, Tobias, and Rhoda Weeks-Brown.  2021.  “Crypto Assets as National Currency? A Step Too Far.” IMF Blog, July 26. Washington, DC. https://www.imf.org/en/Blogs/Articles/2021/07/26/blog-cryptoassets-as-national-currency-a-step-too-far.

### Capital flows, correspondent banking, and related empirical studies
- Cheng, Gong, and Alvise Lennkh. 2020. “RFAs’ Financial Structures and Lending Capacities: A Statutory, Accounting and Credit Rating Perspective.” ESM Working Paper 44, European Stability Mechanism, Luxembourg.
- Rice, Tara, Goetz von Peter, and Codruta Boar.  2020. “On the Global Retreat of Correspondent Banks.” Bank for International Settlements. March 1, 2020. https://www.bis.org/publ/qtrpdf/r_qt2003g.htm.
- He, Dong, and Xiangrong Yu. 2016. “Network Effects in Currency Internationalisation: Insights from BIS Triennial Surveys and Implications for the Renminbi.” Journal of International Money and Finance 68:203–29.
- Goldsmith-Pinkham, Paul, Isaac Sorkin, and Henry Swift. 2020. “Bartik Instruments: What, When, Why, and How.” American Economic Review 110 (8):  2586–624.
- Jaeger, David A., Joakim Ruist,  and Jan Stuhler.  2018. “Shift-Share Instruments and the Impact of Immigration.” NBER Working Paper w24285, National Bureau of Economic Research, Cambridge, MA.
- Laeven, Luc, and Fabian Valencia.  2018. “Systemic Banking Crises Revisited.” IMF Working Paper 2018/206, International Monetary Fund, Washington, DC.
- Porter, Nathan, Camilo E. Tovar Mora, Juan P. Trevino, Johannes Eugster, and Theofanis Papamichalis. 2022. “The Systemic Impact of Debt Default in a Multilayered Global Network Model.” IMF Working Paper 2022/171, International Monetary Fund, Washington, DC.
- Tovar Mora, Camilo E., Yiqun Wu, and Tianxiao Zheng. 2022. “Stress Testing the Global Economy to Climate Change–Related Shocks in Large and Interconnected Economies.” IMF Working Paper 2022/189, International Monetary Fund, Washington, DC.

*References compiled from the source document.*

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_Source: https://www.imf.org/-/media/files/publications/imf-notes/2024/english/insea2024001.pdf_