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Introduction

Financial technology, or fintech, refers to the use of digital technologies and platforms to provide or facilitate financial services, such as payments, lending, insurance, and investing. Fintech is changing the way people and businesses access and use money, creating new opportunities and challenges for consumers, providers, regulators, and policymakers. One of the most prominent and controversial aspects of fintech is the emergence of digital currencies, which are electronically stored monetary value denominated in, or pegged to, a currency like the euro or the dollar. Digital currencies can be issued by different entities, such as central banks, commercial banks, technology firms, or decentralized networks, and can have different features, such as anonymity, programmability, or interoperability. Some examples of digital currencies are stablecoins, which are backed by assets or fiat currencies to maintain a stable value; central bank digital currencies (CBDCs), which are issued by central banks as a digital form of legal tender; and cryptocurrencies, which are based on cryptographic protocols and distributed ledger technology (DLT), such as blockchain. The main purpose of this article is to explore the economic and social implications of the rise of digital currencies for the monetary system and the society at large.

Benefits of digital currencies

Digital currencies offer several benefits for different stakeholders in the economy and society. For consumers, digital currencies can lower the costs and increase the speed and convenience of making payments, especially across borders. Digital currencies can also enable greater financial inclusion by providing access to digital money and financial services for those who are unbanked or underbanked. For businesses, digital currencies can reduce frictions and risks in trade and commerce, such as exchange rate volatility, transaction fees, fraud, and counterparty risk. Digital currencies can also foster innovation and competition in the financial sector by creating new business models and platforms for delivering financial services. For governments and central banks, digital currencies can enhance the efficiency and security of the payment system by reducing intermediaries and reliance on legacy infrastructure. Digital currencies can also improve the effectiveness of monetary policy transmission by allowing for more direct and granular control over money supply and interest rates. Some examples of how digital currencies have delivered or could deliver these benefits in practice are:

– The Bahamas launched the world’s first CBDC,, called the Sand Dollar,, in October 2020, aiming to improve financial inclusion and resilience in its archipelagic nation.
– China’s Digital Currency Electronic Payments (DC/EP) project, , also known as e-CNY⁵, is one of the most advanced CBDC initiatives in the world, testing various use cases for retail and wholesale payments.
– Sweden’s e-krona project is exploring the possibility of issuing a CBDC as a complement to cash in response to the declining use of cash in the country.
– Facebook’s Diem (formerly Libra) is a proposed stablecoin backed by a basket of fiat currencies and assets, aiming to create a global payment network that is accessible to billions of people.
– Bitcoin is the first and most popular cryptocurrency based on blockchain technology, offering a decentralized and censorship-resistant alternative to fiat money.

Risks and challenges of digital currencies

Digital currencies also pose several risks and challenges for different stakeholders in the economy and society. For consumers, digital currencies can expose them to volatility, scalability, security, privacy, regulation, and governance issues that could undermine their trust and confidence in the value and usability of digital money. For example, digital currencies can fluctuate significantly in value due to market forces, technical glitches, or regulatory actions, resulting in losses or gains for holders and users. Digital currencies can also face scalability problems due to the limitations of the underlying technology or infrastructure, leading to congestion, delays, or high fees in processing transactions. Digital currencies can also be vulnerable to cyberattacks, theft, or fraud, as well as data breaches, surveillance, or censorship, depending on the design and implementation of the system. Digital currencies can also face regulatory uncertainty or inconsistency across jurisdictions, as well as governance challenges in terms of accountability, transparency, and coordination among stakeholders. Some examples of how digital currencies have faced or could face these risks and challenges in practice are:

– Bitcoin experienced a sharp drop in value in May 2021, partly due to China’s crackdown on cryptocurrency mining and trading, as well as Tesla’s decision to stop accepting bitcoin as payment for its cars.
– Ethereum, the second-largest cryptocurrency by market capitalization, has been struggling to cope with the high demand and congestion on its network, resulting in slow transactions and high fees for users.
– Tether, the largest stablecoin by market capitalization, has been under scrutiny by regulators and investors for its lack of transparency and backing of its reserves, raising doubts about its stability and credibility.
– The Bank of Canada’s CBDC contingency plan acknowledges the trade-offs between security and privacy in designing a CBDC, stating that “a CBDC should be as secure as cash, while protecting users’ privacy within reasonable limits”.
– The International Monetary Fund (IMF) has warned that the widespread adoption of digital currencies could pose challenges for the international monetary system, such as currency substitution, exchange rate volatility, capital flow volatility, and loss of seigniorage.

Citations

: [The Bahamas launches the world’s first CBDC, the ‘Sand Dollar’](https://cointelegraph.com/news/the-bahamas-launches-world-s-first-cbdc-the-sand-dollar)
: [Sand Dollar](https://sanddollar.bs/)
: [The Bahamas is the first country to launch a CBDC](https://www.economist.com/finance-and-economics/2020/10/24/the-bahamas-is-the-first-country-to-launch-a-cbdc)
: [China’s Digital Currency Electronic Payments (DC/EP) project](https://www.bis.org/review/r200924b.pdf)
: [China’s digital currency is called e-CNY and not yuan](https://www.scmp.com/economy/china-economy/article/3132499/chinas-digital-currency-called-e-cny-and-not-yuan-heres-why)
: [Bitcoin price plunges as China cracks down on mining and trading of cryptocurrency](https://www.cnbc.com/2021/05/21/bitcoin-btc-price-plunges-as-china-cracks-down-on-crypto-mining-trading.html)
: [Ethereum network fees jump amid DeFi demand, even as ETH price falls](https://www.coindesk.com/ethereum-network-fees-jump-amid-defi-demand-even-as-eth-price-falls)
: [Tether says its reserves are fully backed — but what’s behind those reserves?](https://www.cnn.com/2021/05/13/investing/tether-reserves-bitcoin/index.html)
: [Contingency planning for a central bank digital currency](https://www.bankofcanada.ca/wp-content/uploads/2020/02/swp2020-5.pdf)
: [Digital Currencies: Implications for the International Monetary System](https://www.imf.org/en/Publications/WP/Issues/2021/03/26/Digital-Currencies-Implications-for-the-International-Monetary-System-50264)