European Central Bank | Digital Challenges Facing International Monetary and Financial Systems

Guide

Benoit Seure, a member of the Executive Committee of the European Central Bank, made a speech on September 17, 2019 at the Central Bank of Luxembourg – Toulouse School of Economics on "The Future of the International Monetary System".
The statement said that the private digital currency will be more likely to challenge the dollar hegemony for two reasons. First, because of the large user base of private digital currencies and their network effects, they can accelerate their acceptance and reduce the cost of currency switching. Second, the drivers of international currency use in the digital age may change. The first is convenience—connecting a new currency (such as Libra) to an existing network may be easier than building a new network on an existing currency (such as the euro). The second is privacy-related preferences.
Digitization can significantly change the way in which currencies compete with each other. There may be three kinds of equilibrium in the future international monetary and financial system. The first equilibrium is to maintain the status quo, but Libra will prompt central banks to work to improve existing payment systems. The second equilibrium is the synthetic hegemonic currency proposed by Bank of England Governor Mark Carney, provided by the central bank's digital currency network composed of central banks. The third equilibrium is a digital currency zone that is more subversive and lays the foundation for the rise of a truly global digital currency.
The speech concludes that global “stabilized currency” attempts will prove subversive and they are a natural consequence of rapid technological advancement, globalization and a shift in consumer preferences.
Dragon White
September 30, 2019

Digital challenges facing the international monetary and financial system

translation: Yuan Hongzhe proofreading: Dragon White

Member of the Executive Committee of the European Central Bank Benoye Seure
Twenty years ago, when the euro was founded [1], it was hailed as one of the most important turning points in the history of the international monetary system since the demise of the Bretton Woods system. [2] Many observers believe that the euro is a natural contender that rivals the hegemony of the dollar in the global monetary and financial system. After all, the Eurozone has remained and remains the largest trading group in the world. [3]
China's extraordinary rise in the global economy, its expanding role in international trade, and the inclusion of the renminbi in the International Monetary Fund's (IMF) Special Drawing Rights (SDR) valuation basket in 2016 are widely regarded as the international financial system. Another turning point.
However, the US dollar remains the dominant international currency. [4] It thwarted all attempts to challenge its monopoly position, even dating back to the 1980s, when the rise of Japan as a global creditor would support the internationalization of the yen. [5]
At present, the US dollar accounts for about half of the world's total foreign exchange transactions of 6.6 trillion US dollars per day. [6] It is used for nearly half of the world's foreign trade pricing, far exceeding the United States' share of the global economy. [7] It is now widely used as a reference unit for exchange rate arrangements, as in the Bretton Woods era. In some ways, it even played a bigger role. [8]
Today, the discussion is about so-called “stabilized coins” – crypto assets with value stability characteristics. [9]
Although private digital forms of currency have existed for decades, Facebook's large customer base suggests that Libra may be the first private proposal to truly cover the world from day one. Facebook has more than 2.4 billion users, more than a quarter of the world's population. [10] WhatsApp and Instagram are all owned by Facebook, with 1.6 billion and 1 billion users each. [11]

From left to right: WhatsApp, Facebook, Instagram
The global “stabilized currency” proposal can make international payments cheaper, faster, and support financial inclusion. But they pose serious challenges in a wide range of policy areas: operational robustness, security and robustness of payment systems, consumer protection, financial stability and currency sovereign risk, and data protection with anti-money laundering and anti-terrorist financing. Rules and regulations. [12]
Some public authorities have expressed strong concerns, suggesting that very high regulatory barriers will be imposed on these proposals. Partly to respond to these concerns, [13] a working group of the G-7 was authorized to examine the global “stabilized currency” in more detail.
The team is expected to provide policy advice to the G-7 ministers and central bank governors before the International Monetary Fund-World Bank Annual Meeting in October this year. The Financial Stability Board has also begun to study the impact of these initiatives on regulation.
In my speech tonight, I would like to discuss Libra, or a similar global "stabilizing currency" proposal, whether it could become a competitor to the US dollar iron throne. First, I will discuss the factors that distinguish today's discussion from previous discussions. I believe that in certain circumstances, if allowed to develop, private digital forms of currency can challenge the hegemony of the dollar more easily and faster than other sovereign countries.
However, regardless of the fate of private digital currencies, they are likely to change the international monetary and financial system in one way or another, either directly or through global central bank innovation.

Digital and currency competition

For more than a century, the competition for prominent positions in the international monetary system has been limited to the currency issued by sovereign states. For a long time, economic scale, openness and stability have been considered to be key determinants of the success and demise of international currencies.
The fact that the global appeal of the yen, the euro and the renminbi has not risen more strongly is often associated with one or a combination of these factors. For example, in the case of the euro, the fragmented regional capital markets and the lack of real European security assets – providing stability in a challenging economic era – are likely to prevent the euro from being used more widely. [14] There is a large body of literature to assess the relative importance of these and other factors. [15]
However, the general consensus is that other currencies continue to face considerable obstacles in replacing the US dollar in the international monetary and financial system, and it is expected that the overall pattern of the system will remain unchanged in the near future.
This raises the question of whether the arrival of a currency in the form of private numbers will more easily challenge the order of the current system – whether these “currencies” have special features that allow them to compete more effectively with the US dollar, assuming they are Passed the high standards set by global regulators.
In my opinion, the short answer is "yes" – there are two main reasons.

The power of inertia may become less powerful

The first question is related to the speed at which (money) is accepted or the likelihood that the system will change rapidly.
The global currency, like the domestic currency, serves the three classic functions of money—a financial accounting unit, a value store, and a means of payment. [16] But not all functions are equally important. Both history and theory have shown that as a means of payment, it is in fact the main function of the global currency. [17]
However, in the past, international payments were mainly carried out by companies, merchants, banks and governments, mainly in the form of wholesale transactions for large players in global trade and financial markets. For example, banks in Amsterdam and Hamburg fulfilled the main functions of the central bank as early as the early 17th century, and were created to provide merchants with transfer deposits as an efficient and stable payment method. [18]
The rise of the British pound as an international currency began in London as a so-called commercial bank providing loans to merchants to finance import and export. After that, the pound developed into a tool for international investment and became a reserve currency.
For companies, merchants, banks, and governments, agreeing on an international monetary standard and switching from one international monetary standard to another involves significant costs. They usually hold large amounts of money denominated in major international currencies and therefore bear exchange rate risk, believing that this currency will remain the world's main payment unit in the future.
Therefore, the inertia of international currency use has always been great. High conversion costs, lock-in effects, and habitual persistence are powerful forces that help maintain the status quo. [19] It is an active debate about how long it takes for one major currency to replace another. But the consensus is that this process will take years, if not decades. [20]
In contrast, consumer exposure and interest in global currency use is often limited, except for "dollarized" or "euro" economies, where the dollar or euro is or is, instead of its domestic currency, formal or informal Payment method. [twenty one]
However, this situation has changed. The recent wave of globalization, coupled with the rapid growth of online services, supports consumer demand for cross-border payment services that are faster, cheaper and easier to use.
For example, global travel traffic has doubled in the past 15 years. The number of Internet users has also doubled, and the number of mobile phone users has doubled. The cost of sending data has been greatly reduced, and access to more convenient services has expanded. In just a decade, global remittances have increased by more than 50%, while cross-border e-commerce activities have tripled. [twenty two]
Therefore, it is natural for new and emerging private payment solutions to target consumers and workers rather than merchants. Consumers and workers constitute a larger potential user base and have a related network effect, which means that existing digital currency proposals have been accepted more quickly.
Take a look at M-Pesa. It completely clears the payment by clearing low-value transactions without a bank account. Kenya’s mobile currency transactions have tripled in less than seven years and now account for half of the country’s gross domestic product. Developed economies are just beginning to catch up with Kenya.

M-Pesa in Kenya
In China, Alipay and WeChat Pay, two payment solutions developed by domestic big technology companies, have attracted nearly 1 billion customers in less than a decade. Big technology companies' payment services account for 16% of China's GDP, higher than other countries and regions. Last year, China’s third-party mobile payment transactions exceeded 15 times in 2015. [25]
Therefore, available evidence suggests that in terms of retail consumer payments, transaction and conversion costs are much smaller than traditional currencies used for wholesale cross-border trade and finance. This network effect will be stronger for global networks and may make international currency competition a more dynamic competition in the future.

Drivers of international currency use in the digital age

This brings me to the second point, that is, the factors driving the use of international currency may also change. Since consumers are at the heart of competition, we may have to rethink a range of factors and their relative importance that will ultimately determine the scale and scope of global currency adoption.
Of course, some basic drivers will not change.
Price stability remains and will continue to be a prerequisite for the widespread use of money, whether or not the currency is in digital form. To this end, global central banks have made price stability a top priority. This is why unstable cryptographic assets, such as Bitcoin, whose prices in French currency are highly volatile, will never be a reliable means of payment. “Stable coins”, if they fulfill their commitment to stability, are the natural next step in the evolution of digital assets.
This was known nearly 50 years ago when Friedrich Hayek proposed to abolish the government's monopoly on currency issuance, arguing that the amount of competitiveness would impose disciplinary influence on issuers and motivate them to provide stable currencies. In the end, the currency with the lowest inflation will win.
In addition to stability, other factors may play an increasing role in the digital age. Convenience is the primary candidate.
Look at the euro zone. Despite the creation of a single currency 20 years ago, cross-border e-commerce in the euro zone did not take off. Domestic bias is still strong. Only one-third of European e-shoppers buy goods from sellers in other EU countries. About 40% of European websites are not sold to consumers in other member countries, and nearly 80% of online sales are domestic. [28]
In other words, connecting a new currency (such as Libra) to an existing network may be easier than building a new network on an existing currency (the euro). Few retailers see the introduction of the euro as an opportunity to establish a pan-European network around the euro. The single service market is still incomplete, whether or not the euro is used.

Facebook's digital currency Libra
The global “stabilized currency” proposal may be reversed. They can change the nature of the payment. For example, WhatsApp is a messaging service. Increasing the payment function to allow direct transfer between its registered users will not change the nature of its business. But it will provide a platform to turn payment instruments into global currencies. This is exactly the opposite of the theoretical model predictions used by global currencies. According to these models, the payment leads and other uses follow.
The second relevant new driver of international currency use in the digital age is related to privacy.
Historically, privacy is not a problem. Anonymity is one of the salient features of banknotes. [29] Private digital currencies run through distributed ledgers In the virtual world, it can be said that anonymity has been restored, making them easily used to finance illegal activities such as tax evasion or terrorism. [30]
Therefore, to pass the confidence test, any “stabilized currency” proposal must comply with international anti-money laundering and customer identification regulations. [31]
However, assuming they do comply with applicable regulations, "stabilized coins" can be differentiated based on the amount of personal data they collect and process. Some proposals may use or sell customer data, while others may give priority to protecting the privacy of their customers.
It's hard to say how much the privacy layer has to face the use of international currency. But the effect may also be reversed. There are significant differences between countries in terms of consumers' emphasis on data privacy. In Europe, since May 2018, personal control of their personal data has been protected by EU regulations (ie General Data Protection Regulations or GDPR). [32] Any private digital currency operating in the EU must comply with this requirement.

The future form of the international monetary and financial system

All of this means that digitization can significantly change the way currencies compete with each other. This also means that predicting the future pattern of the international monetary and financial system will become more difficult.
Several balances are imaginable. I would like to briefly discuss three of them, each of which has a very different impact on the future shape of our international monetary and financial system.

Maintain the status

The first possible balance may be the status quo.
In most parts of the world, including the United States, Libra expressed considerable concern. Some governments have announced that Libra will be banned when it is up and running.
In other words, standards for protecting security from theft, fraud, and operational errors can be too harsh or costly for many proposals.
However, this balance does not mean that the numbers are stagnant. Other proposals can help meet the growing consumer demand for cross-border payment services that are faster, cheaper, and easier to use than current payment systems.
Libra undoubtedly sounded the alarm for central banks and asked them to step up their efforts to improve existing payment systems. This in itself is undoubtedly a win-win situation for the international community. Those central banks that are already at the forefront of technology are expected to accelerate the speed of cross-border technology transmission. [33]
Europe has set an example in this regard. For example, in November last year, the euro system launched Target Instant Payment Settlement (TIPS), a new market infrastructure that allows payment service providers to provide real-time, all-weather and year-round fund transfers to customers across Europe. service.
TIPS can be a role model for developing economies. Not only does it have the potential to help incumbents better cope with the challenges posed by the digital giant, but it can also be a catalyst for financial inclusion, and financial inclusion should be a key goal of any public proposal in the payments arena. [34]

Central bank digital currency

The second related equilibrium is a synthetic hegemonic currency recently introduced by Bank of England Governor Mark Carney, which is provided through the central bank's digital currency network, CBDC. [35]
In recent years, many central banks have been studying CBDC, albeit at different speeds, depending on the difference in citizens' demand for cash. For example, the Central Bank of Sweden and the Central Bank of Uruguay are among the most advanced central banks in the field. Their experiments on "electronic krona" and "electronic pesos" provide useful insights. According to reports, the People's Bank of China has also accelerated its digital currency plan for Libra. [37]
Since the "Ban Cole" proposal put forward by John Maynard Keynes, the costs and benefits of issuing global synthetic currency have been discussed, which is far beyond the scope of this article. In fact, they have little to do with new technologies, but are closely related to the interest of global economic cooperation. This interest has been low since the fall of the Bretton Woods system – many people will say that it is now even lower. [38]
But the cooperation is what President Carney has called: strengthen central bank coordination to benefit from recent technological advances faster and more efficiently. In this spirit, the European Central Bank and the Bank of Japan have joined forces to study the possibility of using distributed ledger technology in financial market infrastructure. [39]
The next natural step is the joint efforts of global central banks to jointly study the feasibility of CBDC based on common technical standards.

Digital currency area

The third balance I want to briefly outline will be more destructive. It is in the spirit of the “digital currency zone” that Marcus Brennermeier, Harold James and Jean-Pierre Landau say, that these regions will cross national borders. [40]
A digital currency area is a network that uses a network-specific currency (whether legal or otherwise) to pay and trade digitally. [41]
In this hypothetical world, policymakers will successfully cross-border coordination to ensure that global private payment system providers fully comply with key policy priorities.
In an extreme case, cooperation will span across continents and lay the foundation for the rise of truly global private digital currencies. This will have a long way to go. Today, even networks such as Facebook, Amazon, or Alipay are still limited to geographic blocks, and this has long since the discussion about payment system regulation began.
Therefore, it is more conceivable to have a digital regional currency area. Given the high level of regulatory and economic convergence, Europe is certainly best suited to make progress here. But others may follow suit.
However, this equilibrium will bring the risk of splitting the international monetary system. The transition to this equilibrium will present several challenges for public authorities.
Currency substitution will be one of them. Stabilization of the currency” may start with an economy with high inflation or weak institutions – the principle of Gresham is just the opposite. [42] The decline in the main fiat currencies will in turn weaken the effectiveness of monetary policies in these economies. But unlike “traditional” currency substitution, “stabilizing the currency” may delegate key policies in the public domain to private payment system providers – a result that is clearly not acceptable to the public. [43]
The global “stabilizing currency” may also increase capital flow volatility, have a potential impact on exchange rates and financial conditions, and thus have an impact on domestic inflation outcomes. [44] For example, small open economies may seek to introduce or increase capital controls to limit or offset such fluctuations, especially if capital flows are unilateral.
In other jurisdictions where financial markets are deep and liquid, global “stable currency” issuers purchase safe assets that may increase the scarcity to compress the term premium, thereby reinforcing or offsetting actions taken by domestic central banks. [45]
In other words, the journey to the digital currency zone is long and long. Ultimately, however, the formation of an international monetary and financial system will depend on two factors: whether citizens are eager to be part of a global network, and differences in taste and preferences, including differences in privacy.

 

in conclusion

No matter where our journey goes, I want to conclude that global “stabilized currency” attempts, such as Libra, will prove subversive in one way or another. They are a natural consequence of rapid technological advancement, globalization and the shift in consumer preferences.
However, how we respond to these challenges is up to us. We can focus on ensuring that private payment systems thrive in a space that respects our common global policy priorities. Or, we can speed up our efforts to overcome the weaknesses that still exist in the global payment system, and fully believe that only public money can ultimately and collectively ensure a safe value store, a reliable financial accounting unit and a stable Means of payment. Or, we can do both to create an environment where market-based and public payment systems complement each other and shape the world of payments in the 21st century. Thank you!

 

Original endnote

 

[1] I would like to thank Arnaud Mehl for his contributions to this speech. I remain assured responsible for the opinions contained herein.

[2] See Bergsten, F. (1997), “The dollar and the euro”, Foreign Affairs , Vol. 76, No 4, pp. 83-95.

[3] The United States accounts for about 11% of global trade, compared with 14% for the euro area.

[4] For an overview of the international role of the US dollar, see, for example: Goldberg, L. and Lerman, R. (2019), “The US dollar's global roles: where do things stand?”, Liberty Street Economics The renminbi is currently the fifth most used unit in international payments, behind the Japanese yen and the pound Sterling; see SWIFT (2019), RMB tracker – Monthly statistics and reporting on renminbi progress towards becoming an international currency , July 2019.

[5] See eg Tavlas, G., and Y. Ozeki (1991), “The Japanese yen as an international currency”, IMF Working Paper , No. 91/2.

[6] See Bank for International Settlements (2019), Triennial central bank survey. Foreign exchange turnover in April 2019 , 16 September.

[7] See Gopinath, G. (2015), “The international price system”, Working Paper Series , No 21646, National Bureau of Economic Research.

[8] For instance, around one-third (GDP-weighted) of countries worldwide used the US dollar as an exchange rate anchor in 1970, compared with nearly one-half in 2015 (see Ilzetzki, E., Reinhart, C. and Rogoff, K. (2019), "Exchange arrangements entering the twenty-first century: which anchor will hold?", The Quarterly Journal of Economics , Vol. 134, No 2, pp. 599-646). In addition, about two -thirds of official foreign exchange reserves are invested in the US dollar.

[9] For more details on “stablecoin” initiatives, see eg Bullmann, D., J. Klemm and A. Pinna (2019), “In search of stability in crypto-assets: are stablecoins the solution?”, ECB Occasional Paper Series , No 230.

[10] Facebook defines a monthly active user as a user who has logged in and visited Facebook through its website, a mobile device or its Messenger application in the last 30 days as of the date of measurement (see Facebook's 2019 Q2 report, available at Https://investor.fb.com/financials/default.aspx).

[11] Data on monthly users retrieved from statista.com (on 15 August 2019). There is overlap between Facebook's family of products; an estimated 2.7 billion users use Facebook, Instagram, WhatsApp or Messenger each month.

[12] See Cœuré, B. (2019), “Update from the Chair of the G7 working group on stablecoins”, update to the G7 Finance Ministers and Central Bank Governors Meeting 17-18 July 2019, Chantilly, France.

[13] See Ministère de l'économie et des finances and Bundesministerium der Finanzen (2019), “Joint statement on Libra”, Helsinki, 13 Septembre 2019.

[14] See Cœuré, B. (2019), “The euro's global role in a changing world: a monetary policy perspective”, speech at the Council on Foreign Relations, New York City, 15 February 2019.

[15] See eg Maggiori, M., Neiman, B. and Schreger, J. (2019), “The rise of the dollar and fall of the euro as international currencies”, AEA Papers and Proceedings , Vol. 109, American Economic Association, pp. 521-526.

[16] See, for example, Krugman, P. (1984), “The international role of the dollar: theory and prospect”, Exchange Rate Theory and Practice , National Bureau of Economic Research, University of Chicago Press, pp. 261- 278.

[17] For historical evidence see Eichengreen, B., Mehl, A. and Chiţu, L. (2017), How global currencies work – Past, present and future , Princeton University Press. Moreover, Gita Gopinath and Jeremy Stein provide a unified Theory for why a currency may be used dominantly in global trade and finance, where its role as an invoicing unit of international trade transactions is complementary to its role as a safe store of value; Gopinath, G. and J. Stein (2018), "Banking, trade, and the making of a dominant currency", NBER Working Paper , No. 24485.

[18] See Bindseil, U. (2018), “Pre-1800 central bank operations and the origins of central banking”, mimeo.

[19] See also Portes, R. and Rey, H. (1998), “The emergence of the euro as an international currency”, Economic Policy, Vol. 13, No 26, pp. 307-343.

[20] According to a seminal study by Robert Triffin, it took between 30 and 70 years for the US dollar to overtake the pound sterling as the dominant international currency (see Triffin, R. (1960), Gold and the dollar crisis: the Recent of convertibility , Yale University Press: New Haven). More recent studies have challenged that view and suggest that the transition from the pound sterling to the US dollar was much faster (see, for example, Chiţu, L., Eichengreen, B. And Mehl, A. (2014), “When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets,” Journal of Development Economics , Vol. 111(C), pp. 225-245).

[21] See, for example, Calvo, G. (2002), “On dollarization”, The Economics of Transition , Vol. 10, No 2, pp. 393-403.

[22] See Committee on Payments and Market Infrastructures (2018), Cross-border retail payments , Bank for International Settlements, Basel. Data on tourism flows (international tourist arrivals by world region) are from the United Nations World Tourism Organization; Internet and mobile phone users are from the International Telecommunication Union and the World Bank; and data on global remittances are from the World Bank. There are no direct data on cross-border e-commerce activity, but parcel volume in this area (as measured By the Universal Postal Union) is considered to be a reasonable proxy.

[23] See Rolfe, A. (2019), “Mobile money transactions equivalent of half of Kenya's GDP”, Payments Cards and Mobile , 25 January.

[24] This refers to mobile payments for consumption in 2017.

[25] This includes mobile consumption, mobile finance, personal application and other payments such as telecom recharging.

[26] See Hayek, F. (1976), Denationalisation of money , Hobart Paper Special, 70, Institute of Economic Affairs, London.

[27] See Eurostat (2018), “E-commerce statistics for individuals”, Statistics Explained , 20 December 2018.

[28] See “The economic policy at the heart of Europe is creaking”, The Economist , 16 September 2019.

[29] For further discussion, see Rogoff, K. (2014), “Costs and benefits to phasing out paper currency”, paper presented at the NBER Macroeconomics Annual Conference, 11 April.

[30] In reality, current private crypto-assets only allow for pseudo-anonymity, as all transactions are publicly recorded. But users do not have have to reveal their true identities.

[31] See Financial Action Task Force (2019), “Guidance for a risk-based approach to virtual assets and virtual asset service providers”, June.

[32] The GDPR (Regulation (EU) 2016/67) governs data protection and privacy for all individual citizens of the EU and the European Economic Area. It was adopted on 14 April 2016 and became enforceable on 25 May 2018. The GDPR also Addresses the transfer of personal data outside the EU. One possible implication of this is a race to the top in terms of data protection standards.

[33] See Cœuré, B. (2018), “The future of financial market infrastructures: spearheading progress without renouncing safety”, speech at the Central Bank Payments Conference, Singapore, 26 June.

[34] See Cœuré, B. (2019), “Payments for the people”, introductory remarks at the High-Level Meeting on Financial Inclusion, Basel, 27 May.

[35] See Carney, M. (2019), “The Growing Challenges for Monetary Policy in the current International Monetary and Financial System”, speech given at the Jackson Hole Symposium, 23 August.

[36] See Barontini, C. and Holden, H. (2019), “Proceeding with caution – a survey on central bank digital currency”, BIS Papers , No 101, Bank for International Settlements, January.

[37] China sees local leadership in digital payment services as a strategic goal – precisely with the aim of avoiding the future of digital money being dominated by one player in the way that the global monetary and financial system has so far been dominated by one currency See Chorzempa, M. (2019), “Who Likes Facebook's Libra Currency? Not the Chinese”, Realtime Economic Issues Watch , Peterson Institute for International Economics, 16 July.

[38] As the late Tommaso Padoa-Schioppa stressed: “Not surprisingly, the final de-linking from gold shifted monetary management away from international constraints towards domestic priorities. Monetary nationalism took over”; see Padoa-Schioppa, T. (2010) "The ghost of Bancor: the economic crisis and global economic disorder", lecture at the University of Louvain-la-Neuve, 25 February.

[39] A report was published in March 2018 (see ECB and Bank of Japan (2018), "Securities settlement systems: delivery-versus-payment in a distributed ledger environment", STELLA – a joint research project of the European Central Bank and The Bank of Japan).

[40] See Brunnermeier, M., James, H. and Landau, JP (2019), “Digital currency areas”, Vox , 3 July.

[41] So, as they put it, even if the network still uses official fiat currencies as a unit of account and to back the payment instrument, that instrument cannot be used for transactions and exchanges outside the network.

[42] Gresham's law is a monetary principle stating that "bad money drives out good". That dollarization is akin to a reversal of Gresham's law is a long-standing theme in the academic literature; see eg Guidotti, P. and C. Rodriguez (1992), "Dollarization in Latin America: Gresham's law in reverse?", IMF Staff Papers , 39, pp. 518-544.

[43] For further detail see Adrian, T. and T. Mancini-Griffoli (2019), “The rise of digital money”, IMF Fintech Note, 19/01. Dual or multiple currency systems entail transaction costs for agents which explain why They remain relatively rare (see Engel, C. (2018), “The Implications of Digital Currencies for Monetary Policy and the International Monetary System,” paper presented at the ABFER workshop on digital currency economics and policy, Singapore, 14-18 November 2018 .)

[44] See eg Pettis, M. (2019), “Facebook's Libra: Does the World Need Frictionless Money?”, Carnegie Endowment for International Peace , 27 June 2019. During periods of financial stress, some emerging market and developing economies may see Outflows of commercial bank deposits into “stablecoins”. This might reduce domestic financial intermediation, accelerate capital outflows and increase exchange rate volatility.

[45] And they could increase scarcity of safe assets in the major banking sectors and complicate open market operations, as eligible collateral becomes scarcer. This would be the case provided that flows into global "stablecoins" do not come exclusively from flows out of deposits In those same banking sectors.

This article was produced by the Digital Assets Institute.