A New Era for Money

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A New Era for Money

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Bibliographic details

• Authors: Eswar Prasad
• Published: September 1, 2022

Transformation of money and payments

• The era of physical currency, or cash, is drawing to an end; the age of digital currencies has begun.
• Digital technologies are creating a new round of competition between official and private currencies in domestic and international arenas.
• Innovations are lowering costs and expanding access to saving, credit, and insurance products; small-scale entrepreneurs can secure financing from nonbank sources such as web-based platforms (example: Prosper).
• Domestic and international payments are becoming cheaper and quicker, benefiting consumers and businesses.

Stability concerns and technological limits

• Cryptocurrencies (example: Bitcoin) were expected to revolutionize payments but have been hampered by volatile prices and constraints to transaction volumes and processing times, limiting their effectiveness as mediums of exchange.
• Stablecoins—often backed by stores of central bank money and government securities—have gained more traction as means of payment.
• Blockchain technology is enabling secure ownership of purely digital objects and fostering new digital assets, such as non-fungible tokens.
• Central banks worry that decentralized payment systems or private stablecoins could displace cash and regulated payment systems, creating risks if private infrastructures freeze up during financial turmoil.

Central bank digital currencies (CBDCs): motives and benefits

• Central banks are contemplating issuing retail CBDCs to:
  • Broaden financial inclusion (giving those without a bank account access to a free digital payment system).
  • Increase efficiency and stability of payment systems by creating a public payment option as a backstop (the role now played by cash).
• Additional potential benefits:
  • Hinder illegal activities (drug deals, money laundering, terrorism financing) that rely on anonymous cash transactions.
  • Bring more economic activity into the formal economy, making tax evasion harder.
  • Lower transaction costs for small businesses and reduce the hassles and risks of handling cash.

Risks of CBDCs and impacts on banking and privacy

• Risk to banking system:
  • Households might move funds from commercial bank accounts into central bank digital wallets perceived as safer, even if they pay no interest, potentially starving commercial banks of deposits.
  • A central bank might then have to allocate credit directly, deciding which sectors and firms receive loans.
  • A central bank retail payment system could suppress private-sector innovation in digital payments.
• Privacy concerns:
  • Central banks would want verifiable records of transactions to prevent illicit use, risking the loss of anonymity and privacy in commercial transactions.
  • A carefully designed CBDC can mitigate many risks, but displacing cash with a CBDC should not be taken lightly.

Monetary policy transmission and structural change

• The proliferation of digital lending platforms could diminish commercial banks’ role in mediating between savers and borrowers, making it unclear how traditional monetary policy transmission (via commercial bank deposits and loans responding to central bank rate changes) will function.
• The basic functions of central-bank-issued money (unit of account, medium of exchange, store of value) are being separated and directly competed over by digital currencies and payment technologies.

Currency competition and international implications

• Privately intermediated payment systems are likely to gain importance as mediums of exchange, intensifying competition with central bank money.
• International financial transactions will become faster, cheaper, and more transparent—benefits for investors, firms, migrants sending remittances, and trade-dependent emerging market and developing economies.
• Risks and challenges:
  • New conduits for cross-border flows will facilitate illicit financial flows and complicate regulators’ and governments’ efforts to control capital movements.
  • Emerging market economies will be more vulnerable to monetary policy actions of major central banks that can trigger sudden capital outflows.
• On reserve currency dominance:
  • Neither CBDCs nor lower transaction costs alone will reorder the international monetary system or unseat major reserve currencies, especially the dollar.
  • Major reserve currencies retain dominance as stores of value due to economic size, financial market depth, and a strong institutional foundation (independent central bank, rule of law).
  • CBDCs will not solve underlying weaknesses in central bank credibility or fiscal indiscipline; digital central bank money is only as strong and credible as the issuing institution.

Government role, regulation, and inequality risks

• Policymakers face choices: resist new financial technologies, passively accept private-sector-led innovations, or embrace efficiency gains while managing risks.
• Regulation is essential to:
  • Maintain integrity of payment systems and financial markets.
  • Ensure investor protection and promote financial stability.
• Financial innovation could democratize finance by easing access for indigent households, but risks include:
  • Benefits being captured largely by the wealthy and incumbent financial institutions.
  • Marginalized individuals lacking digital access and financial literacy being exposed to risky investment opportunities they do not fully understand.
  • Potential to exacerbate income and wealth inequality.
• Larger geopolitical and market-power concerns:
  • Smaller economies and those with weak institutions could see central banks and currencies swept away, concentrating economic power in large economies.
  • Major corporations (examples cited: Amazon, Meta) could accumulate more power by controlling both commerce and finance.
• Governments retain critical roles in enforcing contractual and property rights, protecting investors, ensuring financial stability, and promoting fair competition.

Decentralization, fragmentation, and systemic trade-offs

• Decentralization and fragmentation can:
  • Increase financial stability by reducing centralized points of failure and increasing resilience through redundancy.
  • Also be fragile: fragmented systems may work in good times but lose confidence in crises if they lack backing by a central bank or government agency.
• Societal implications:
  • Displacement of cash by digital payments could eliminate privacy in commercial transactions.
  • Cryptocurrencies’ promise of anonymity and reduced reliance on governments may be undermined by resultant compromises to privacy.
  • Societies will face struggles to check government power as individual liberties face greater risk.

Key findings and policy recommendations

• Findings:
  • Digital currencies and technologies are reshaping how money is created, what forms it takes, and what roles it plays.
  • Stablecoins and CBDCs are central to the near-term evolution of payment systems.
  • Institutional credibility (independent central banks, rule of law) remains crucial for currency trust and stability.
• Policy recommendations / priorities:
  • Design CBDCs carefully to mitigate risks to the banking system and privacy while preserving potential inclusion and efficiency benefits.
  • Implement robust regulation for cryptocurrencies, stablecoins, and other FinTech innovations to protect investors and financial stability.
  • Balance encouragement of private-sector innovation with safeguards against market failures and protection for uninformed consumers.
  • Preserve institutional foundations (central bank independence, rule of law) to maintain trust in digital central bank money.
  • Ensure government policies promote fair competition and prevent concentration of market power by incumbents and large technology firms.

F&D Magazine. "A New Era for Money" by Eswar S. Prasad, September 2022. ESWAR PRASAD is a professor of economics at Cornell University, a senior fellow at the Brookings Institution, and author of The Future of Money. His latest book, The Doom Loop: Why the World Economic Order Is Spiraling into Disorder, will be published in February 2026.

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