02 December 2019

Bruegel: The next generation of digital currencies - in search of stability

Recent developments have re-opened the debate on the future of money. This Policy Contribution discusses two aspects: the implications of the rise of global private stablecoins, such as Facebook's Libra, and the role that public central bank digital currencies could play.

Four major developments have challenged the status quo and reopened the debate on the forms that money will take in the future: 1) use of cash as a medium of exchange has declined; 2) distributed ledger technology (DLT) has led to the emergence of thousands of digital cryptocurrencies; 3) some global tech giants are planning to provide private digital currencies to their billions of users in the form of stablecoins; and 4) in turn, public authorities are thinking about providing their own digital currencies to the general public.

These developments raise questions about the implications for financial stability, the transmission of monetary policy and financial intermediation. This Policy Contribution focuses on the consequences stablecoins and central bank digital currencies could have.

Stablecoins, such as Facebook’s Libra, differ from earlier generations of cryptocurrencies in three fundamental ways. 

New features of stablecoins attempt to correct some of the critical deficiencies identified in first-generation cryptocurrencies, which meant they did not acquire the main functions of money. 

Facebook’s Libra plan has been a wake-up call to central banks and governments which, afraid of losing their monetary sovereignty, have renewed their interest in central bank digital currencies (CBDCs) as a potential solution. CBDCs could make private digital currencies less attractive and slow down their adoption.

But there are other reasons to give the general public access to central bank liabilities. One important reason to provide CBDCs to citizens is that if cash disappears, citizens will lose direct access to sovereign money. Another benefit of the introduction of CBDCs is that monetary policy could be strengthened by transmitting it directly to the general public.

However, the introduction of CBDCs could also be disruptive and create risks. 

Full publication on Bruegel

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