Introduction to the special issue on digital currency

Abstract

Although money in digital form is not new to modern economics, advances in technology have led to a revolution in digital currencies and have facilitated instantaneous peerto-peer transfers of value, which was previously impossible. The advent of new digital currencies could redefine the way in which payments and users’ data interact, reshape the nature of currency competition, and rebuild the architecture of the international monetary system (Brunnermeier, James, and Landau 2019). During the last decade, digital currencies have surfaced in a variety of contexts. The earliest context was cryptocurrencies (CPMI, 2015), such as Bitcoin and Litecoin, which are typically issued and transferred via a decentralized distributed ledger. They are not a liability of any entity and not backed by any authority and thus have zero intrinsic value. Their values are unstable as they are driven by the belief that other market participants would accept them as a means of payment or that their value will continue to increase at a later point. As a result, they are now viewed more as speculative assets rather than a medium of exchange. A special type of cryptocurrency called Stablecoin, such as Libra (proposed by Facebook) and Tether, share a decentralized nature with Bitcoin, but differ in that Stablecoin attempt to maintain price stability. There are generally two ways to ensure that Stablecoins are stable – through collaterals or through algorithms. Collateralized Stablecoins are usually backed by reserve assets, including fiat currency reserves like the US dollar, commodities like oil, or precious metals like gold or silver. Algorithmic Stablecoins do not use reserves but retain a stable price by controlling the supply of coins, implemented by an autonomous consensus mechanism and smart contracts. Given their (alleged) capacity to preserve value over time, the use of Stablecoins, especially those issued by Big-Tech firms, could rise as global payment instruments and pose governance challenges for international finance and monetary policies (FSB, 2020). Given that new technologies and market entrants challenge the traditional bank-based payment systems, 80% of central banks worldwide are currently considering a new type of digital currency controlled by central banks, that is, central bank digital currencies (CBDCs) (Boar, Holden, and Wadsworth 2020). CBDCs are new variants of central bank money that are different from physical cash or central bank reserve/settlement accounts. There are two broad types of CBDCs which are based on their different levels of accessibility: wholesale CBDCs or retail CBDCs. The former is a restricted-access digital