Key Implications of Digital Currencies

Digitization of money has evolved in various forms over the last few years. It has completely revolutionized money and the payment systems, and yet has a lot of scope for disruption. While digital money itself is not new to modern economies, the ability to transfer money instantaneously, peer-to-peer has opened up opportunities and efficiencies. This will and has lead to emergence of new currencies which transcend national borders, redefining the ways in which people use & interact with money & make payments. The emergence of these new methods have a strong potential to reshape the international monetary system and the role of government-issued public money.

The first important economic insight is that digital currencies feature innovations that will unbundle the functions served by money (store of value, medium of exchange, and unit of account), rendering the competition among currencies much fiercer. Digital currencies may specialize to certain roles and compete exclusively as exchange media or exclusively as stores of value.

Secondly, a social impact will be the attempt by digital money issuers to “differentiate” their currency by re-bundling monetary functions of their currency with traditionally separate functions, such as data collection and social networking services (like Libra from Facebook). The ability of these currencies to convert & exchange across different platforms will help exploit the benefits to its maximum effect. The importance of digital connectedness, which often supersedes the importance of macroeconomic links, will lead to the establishment of “Digital Currency Areas” (DCAs) linking the currency to usership of a particular digital network rather than to a specific country. The border-defiant nature of these digital currencies will make both emerging and advanced economies vulnerable to their national currency being replaced by a digital platform’s currency rather than a fiat currency or another developed country’s currency.

Third, in a digital currency, cash may effectively disappear, and payments may center around social and economic platforms rather than banks’ credit provisioning capabilities, weakening the traditional distribution channels of monetary policy. Governments may need to offer central bank digital currency (CBDC) in order to retain the monetary independence - a compulsive thought provoked by cryptocurrencies.

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