Data, Digitalization, Decentialized Finance and Central Bank Digital Currencies by Andreas Dombret

Author:Andreas Dombret
Language: eng
Format: epub
Publisher: De Gruyter
Published: 2023-01-13T16:35:42.029000+00:00

3.5.4  Digitalisation and the international monetary system

Digitalisation has the potential to reshape the international monetary system. As cross-border payments become easier, currency competition may increase and also develop into new dimensions. It may no longer be based only on the macroeconomic and monetary performance of currencies, but also on pure digital interconnectedness and the bundle of services that platforms, networks and stable coins will offer to users. Specialisation may occur, independent of the characteristics and specificities of each jurisdiction. For instance, some networks could intensely exploit or sell users’ data, whereas others may prioritise absolute privacy. Intercountry links may increasingly depend on whether those digital payment systems will – or not – be made interoperable.

In this context, the launch of CBDCs by many countries, first of all China, has often been interpreted as the first act in a new and fierce international currency competition. Whether it will happen or not depends on the forces that drive the international adoption of money. There are, schematically, two ways through which a currency can internationalise: first, by becoming a global store of value, as a reserve instrument; second, by being used for international payments, as a medium of exchange. Historically, the two roles have progressively converged. However, different paths and strategies are conceivable for a currency to gain international status and use in the 21st century. Analysing the current dominant position of the dollar in the international monetary system, some economists (as e. g. Eichengreen 2005) emphasise its function as a reserve asset, based on the size, depth, and liquidity of US financial markets. Others (as e. g. Gopinath et al., 2016) give more importance to its role in the denomination and settlement of international trade and transactions. The distinction becomes relevant and important in a digital environment. Becoming a reserve asset is demanding as it implies, in particular, full and unconditional capital account convertibility. However, if international status can be achieved through trade, a country that is home to large digital networks could find new ways for its currency to gain international acceptance. Digitalisation may thus serve as a powerful vehicle to internationalise some currencies as media of exchange72. It is also likely that the internationalisation of a currency will occur via stable coins, which are subject to the right amount of regulatory scrutiny.

The euro, of course, has the capacity to internationalise along both dimensions: as a reserve asset and medium of exchange (as well as a funding and vehicle currency). It is beyond the scope of this study to discuss whether it should do so. According to the ECB (2020) report on the digital euro, fostering the international role of the euro is not a prime motivation for issuing it. However, should it be created, the design of a digital euro will de facto reveal and imbed preferences regarding its cross-border role. It would also have implications for the international role of the euro.

Privacy, degree of interconnection, and interoperability (both with other CBDCs and foreign private systems) are features that will matter.

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