Digital Currencies and The Monetary System: Review and Issues

Abstract

This paper is a review article on digitalization, generating issues from the discourse. The place of digital currencies in the contemporary world of banking and commerce was discussed, and so were their attractiveness and variants in the emergent trend. The evolution and the conditions for the effectiveness of digitalization, differentiated policy goals of the various central bank digital currency projects as well as the regulatory and supervisory authorities were articulated and highlighted. Three competing models of central bank digital currency concerning the allocation of the functions of issuance, the validity of transactions, ledger update, user interface, user data and customer service were identified and distinguished by the different involvement of the central bank, commercial banks and the private sector in the functions identified. The choice of optimal technology underpinning the central bank digital currency was justified. The characteristics and functions of the various central bank digital currency designs were identified and discussed. Actual and potential challenges of the various central bank digital currencies gave insights into the present and possibly the future operating procedure of the central bank digital currencies. Perceived potential risks of central bank digital currency on commercial banks, financial stability and monetary policy as well as the likely combating measures would shape the future of the monetary system. However, the drivers of the reserve currency status would most likely remain unchanged. Central bank digital currency could offer the opportunity to address the challenges of cross-border payments.