Sovereign Digital Currencies: The Future of Money and Payments?

Abstract

Technology is reshaping money and payment systems in unprecedented ways. Catalysts include the launch of Bitcoin in 2009, the evolution of both decentralised and centralised technologies, the announcement of Libra in 2019, live trials of China’s Digital Yuan, and COVID-19, both in 2020.

This paper focusses on how technology might reshape money and payments going forward. It considers the policy issues and choices associated with cryptocurrencies, stablecoins and sovereign digital currencies and emphasises there is no single model for sovereign digital currency design. The catalysts reshaping monetary and payment systems challenge regulators. While Bitcoin and its thousands of progenies could be ignored safely by regulators, Facebook’s proposal for Libra, a global stablecoin, brought an immediate and potent response from regulators globally. This proposal by the private sector to move into the traditional preserve of sovereigns – the creation of currency – was always likely to trigger such a regulatory response and also the launch of sovereign digital currencies by central banks. China has moved first with its Digital Yuan – an initiative that may well in time provoke a chain of central bank digital currency issuances around the globe.

COVID-19 is driving digitalisation to new heights, particularly in electronic payments. In this context, we argue that central banks should focus not on rolling out novel new forms of sovereign digital currencies, but rather on transforming their payment systems. Further into the future, we expect domestic money and payment systems to involve public central banks cooperating with (new and old) private entities to launch digital currencies which underpin better monetary and payment systems at the domestic and international levels.