## The Currency Revolution

## Source details

**Canonical URL:** [The Currency Revolution](https://www.imf.org/en/publications/fandd/issues/2022/03/currency-revolution-prasad)

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- [Markdown version](/en/publications/fandd/issues/2022/03/currency-revolution-prasad/index.md)
- [Structured JSON version](/en/publications/fandd/issues/2022/03/currency-revolution-prasad/index.json)
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## Bibliographic details
- Authors: CHRIS WELLISZ
- Published: March 2, 2022

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### Overview
- Eswar S. Prasad explains how technology is transforming the nature of money and how that will affect our lives.
- Interview conducted by Chris Wellisz, March 2022.
- Based on Prasad’s book, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance.

### Cash and digital payments
- Digital payments’ convenience for consumers and businesses makes it highly unlikely that cash will survive much longer.
- Examples:
  - China: Alipay and WeChat Pay have blanketed the economy with very low-cost digital payments, usable for small purchases such as fruit or dumplings from a street vendor.
  - Sweden: Private sector provides very low-cost digital payments in advanced economies.

### Cryptocurrencies and stablecoins
- Bitcoin:
  - Has not worked well as a medium of exchange for day-to-day transactions.
  - Main drawback: very unstable value (large intraday/interday value swings affect purchasing power).
  - Operational drawbacks: slow and cumbersome to use.
- Stablecoins:
  - Aim to maintain stable value by being backed by stores of fiat currency, linking their value to currencies such as US dollars or euros.
  - Can make domestic and cross-border payments more effective and efficient.
  - Risks:
    - Verification and liquidity of backing assets: issuer claims to hold liquid securities—who ensures they do so?
    - Runs: simultaneous redemptions may reveal that backing securities are less liquid than expected.
    - Illicit finance: unless closely regulated, stablecoins could become conduits for illicit financing across borders.
    - Cross-border regulatory challenge: cryptocurrencies know no borders, so unilateral national regulation will be difficult; global coordination of regulatory policies is needed.

### Central bank digital currencies (CBDCs)
- Rationales vary by country:
  - Developing countries: broaden financial inclusion for people without access to digital payments or basic banking products and services.
  - Sweden (e-krona): envisioned as a backstop to private payment infrastructure where bank account access is widespread.
  - China (digital yuan): seen as a complement to existing payment systems and a tool to increase competition against dominant private providers.
- Monetary policy and operations:
  - If all citizens had an account with the central bank (e.g., the Federal Reserve), it would simplify operations such as stimulus payments (contrast with pandemic stimulus distribution problems: some households without direct deposit received prepaid debit cards or checks, many lost or misappropriated).
- Design considerations and risks:
  - Threats to private payment providers: government-provided low-cost digital payments may crowd out private competition.
  - Bank disintermediation: commercial bank deposits could be swept into central bank accounts, especially in troubled times when depositors prefer perceived safety.
  - Possible solution: dual-tier CBDC system in which central bank provides underlying payment infrastructure and CBDC in digital token form while commercial banks maintain the digital wallets.

### Implications for emerging market and developing economies
- Benefits:
  - Friction-free international payments could benefit importers and exporters and ease international trade transactions.
- Risks:
  - More conduits for international capital flows increase difficulty managing capital flow volatility and exchange rate volatility.
  - Small and developing economies may face greater challenges managing domestic economic policies amid increased capital flow and exchange rate volatility.
  - Global access to digital versions of major currencies (dollar, renminbi) and issuance of stablecoins by megacorporations (example cited: Amazon) could cause less-credible national currencies to be displaced by trusted foreign or private currencies.
- Central bank credibility factors:
  - Dominance of a reserve currency depends not only on economic size but on institutional frameworks that maintain investor trust, including rule of law, an independent central bank, and checks and balances.

### Policy and regulatory challenges
- Cross-border regulation: cryptocurrencies’ borderless nature necessitates global coordination of regulatory policies.
- User-case specificity: central banks must assess the specific user case for CBDCs in each country (e.g., the US context: payment intermediaries like credit cards impose high interchange fees; about 5 percent of households in the US are still unbanked or underbanked).
- Alternative domestic initiatives: example—“FedNow” project aims to increase efficiency of both retail and wholesale payments in the US, potentially addressing some needs a CBDC might fill.

### Risks to society and surveillance
- Authoritarian risk: a digital central bank currency could be used to surveil a population.
- Social policy risk: even benevolent governments might use digital money to restrict uses deemed not “socially beneficial,” turning money into an instrument of social policy and undermining central bank credibility.

### Key findings and recommendations
- Findings:
  - Digital payments are making cash increasingly obsolete in many settings.
  - Bitcoin’s volatility and operational limits hinder its use as a daily medium of exchange.
  - Stablecoins can improve payment efficiency but pose liquidity, redemption, and illicit-finance risks.
  - CBDCs can improve financial inclusion and payment operations but risk crowding out private providers and disintermediating commercial banks.
  - Emerging markets face particular vulnerabilities from increased cross-border digital currency access and private stablecoin issuance.
  - Institutional credibility (rule of law, central bank independence, checks and balances) remains crucial for a currency’s international standing.
- Policy recommendations and scenarios:
  - Pursue global coordination on cryptocurrency and stablecoin regulation.
  - Consider dual-tier CBDC designs where central banks provide infrastructure and commercial banks operate wallets to mitigate bank disintermediation.
  - Assess CBDC user cases country by country; consider targeted domestic payment system reforms (e.g., FedNow) as alternatives or complements.
  - Monitor and manage potential for digital currencies to enable surveillance or unconventional social policy uses.

*Source: Interview with Eswar S. Prasad, F&D Magazine, March 2022.*

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## Content in this bundle

- **ثورة العملة**
  - [ثورة العملة (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ar/prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [ثورة العملة (PDF)](/-/media/files/publications/fandd/article/2022/march/ar/prasad.pdf){rel="external" type="application/pdf"}
- **La monnaie : une révolution en marche**
  - [La monnaie : une révolution en marche (Markdown version)](/-/media/files/publications/fandd/article/2022/march/fr/wellisz-prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [La monnaie : une révolution en marche (PDF)](/-/media/files/publications/fandd/article/2022/march/fr/wellisz-prasad.pdf){rel="external" type="application/pdf"}
- **Prasad**
  - [Prasad (Markdown version)](/-/media/files/publications/fandd/article/2022/march/prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [Prasad (PDF)](/-/media/files/publications/fandd/article/2022/march/prasad.pdf){rel="external" type="application/pdf"}
- **Валютная революция – Финансы и развитие – Переосмысление бюджетных основ – март 2022 года**
  - [Валютная революция – Финансы и развитие – Переосмысление бюджетных основ – март 2022 года (Markdown version)](/-/media/files/publications/fandd/article/2022/march/ru/prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [Валютная революция – Финансы и развитие – Переосмысление бюджетных основ – март 2022 года (PDF)](/-/media/files/publications/fandd/article/2022/march/ru/prasad.pdf){rel="external" type="application/pdf"}
- **Una revolución monetaria ● Finanzas y Desarrollo ● Marzo de 2022**
  - [Una revolución monetaria ● Finanzas y Desarrollo ● Marzo de 2022 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/sp/wellisz-prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [Una revolución monetaria ● Finanzas y Desarrollo ● Marzo de 2022 (PDF)](/-/media/files/publications/fandd/article/2022/march/sp/wellisz-prasad.pdf){rel="external" type="application/pdf"}
- **货币革命**
  - [货币革命 (Markdown version)](/-/media/files/publications/fandd/article/2022/march/zh/wellisz-prasad.pdf.md){rel="alternate" type="text/markdown"}
  - [货币革命 (PDF)](/-/media/files/publications/fandd/article/2022/march/zh/wellisz-prasad.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2022/03/currency-revolution-prasad_