IMF: Discussion on CBDC and stablecoin usage scenarios and potential impact

IMF: Discussion on CBDC and stablecoin usage scenarios and potential impact

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CBDC is the digital form of the existing legal currency and has not changed the economic power of currency internationalization, but in terms of quantity, they can strengthen the incentives behind currency substitution and currency internationalization.

Original Title: “OKEx Research Recommended Reading: IMF Digital Currency Working Paper (Part 1)”
Written by: International Monetary Fund Compilation: Angela and Cici Chen, both from OKEx Research

The International Monetary Fund (IMF) completed the article “Digital Currency for Cross-border Payments: The Impact of Macro Finance” on September 22, 2020, focusing on the four application scenarios of digital currencies for cross-border payments, and how these Specific analysis of the scene. Since the original working paper is relatively long, we will split it into three and release them separately. This article is the first of the original working paper.

Central bank digital currency (Central bank digital currency, referred to as CBDC) and global stable coin (Global stable coin, referred to as GSC), as new forms of digital currencies, have the advantages of low transaction costs and faster speed in cross-border payments, which are influenced by the financial industry. Wide attention.

This article uses four hypothetical scenarios of CBDC and GSC to help illustrate their potential impact.

  • Scenario 1: Use cross-border payment in a small area;
  • Scenario 2: Used in some countries;
  • Scenario 3: Global use;
  • Scenario 4: Multi-polarization is adopted globally.

This article is the first article in this series, and we will publish the second and third articles later to discuss the impact of these four scenarios on macro-finance and policies. As the International Monetary Fund, the IMF aims to propose new policies, discuss reform plans, or review existing policies and businesses in the current acceleration of digitalization. Based on the global financial market, it throws out the analysis of new concepts, which provides us with a very valuable reference for understanding the concept and application scenarios of digital currency.

This article was translated by Angela and Cici Chen, assistant analysts of the Institute, and William, the chief analyst, was in charge of reviewing the manuscript.

summary

The rapid development of digital technology has expanded the prospects for new forms of digital currency transactions at home and abroad. These include central bank digital currencies (CBDCs) and so-called global stablecoins (GSCs) proposed by large technology companies or platforms.

This article explores the complex interactions between incentives for cross-border adoption and use of CBDCs and GSCs, and discusses potential macro-financial effects.

The use of international currencies reflects the economic weight of the issuing country and broader geopolitical factors. In addition, the strong network effect and synergy between the three functions of money (pricing unit, means of payment, and store of value) becomes a self-reinforcing mechanism: once money is dominant, it tends to maintain its dominant position.

In addition, the use of foreign currencies in domestic transactions (“currency substitution”) depends on the degree of currency stability and the environment of other countries, including legal frameworks and regulations.

However, digitization may promote the international use of currency in a different way from traditional dynamics. CBDCs and GSCs hope to reduce transaction costs by expanding competition, increasing service access opportunities, and promoting financial inclusion through mobile devices and the possibility of providing complementary services on global-scale social networks and e-commerce platforms.

The economic consequences and policy challenges largely depend on the degree of acceptance. Since the latter is unpredictable, this article proposes different stylized adoption scenarios to examine the potential consequences. These range from use in small cross-border payments, to widespread adoption in some countries, to the global adoption of a single GSC, or a few multi-polar worlds characterized by fierce competition between CBDCs and GSCs. The purpose of presenting the scene is to illustrate and explore the possible meanings of the use, but this is not to predict specific results or judge their desirability.

At the global level, currency competition due to the adoption of CBDCs and GSCs can improve risk sharing in the long run.

Transnational adoption of digital currencies also brings risks and policy challenges. Foreign CBDCs and GSCs may increase the pressure on currency substitution and increase the vulnerability caused by currency mismatches. At the same time, it may reduce the ability of local governments to implement monetary policies. Without proper safeguards, they may accelerate illegal flows, making it difficult for regulatory authorities to implement management measures such as foreign exchange restrictions and capital flows. In the case of GSCs, there are additional challenges related to their governance.

In addition to domestic advantages, cross-border use of CBDCs can also help companies and households in bond-issuing countries to better manage risks (for example, issuing debt denominated in domestic currency). However, if it intends to strengthen financial integration without corresponding development in financial markets and financial institutions, the issuing country may be more vulnerable to global

In general, CBDCs do not qualitatively change the economic power of currency internationalization, but quantitatively strengthen the incentive mechanism behind currency substitution and currency internationalization. GSCs, which do not represent independent valuation units, are similar to CBDCs in terms of currency effects, but may affect financial stability because they may suffer from rounds of trust crises. GSCs, which represent new independent valuation units, can also provide better financial services, but they may have a more fundamental impact on global currency and financial stability.
The International Monetary Fund has a universal membership status and shoulders the mission of maintaining international monetary and financial stability. Therefore, the International Monetary Fund has a unique position in bilateral and multilateral supervision and capacity development. These developments can be taken into account in the macro financial Effect and policy influence.

Introduction

Overview

The new form of digital currency is increasingly attracting the attention of policymakers. These include central bank digital currencies (CBDCs) currently envisaged in some countries, and so-called global stablecoins (GSCs) proposed by large technology companies or platforms (“Big Techs”). The potential motivations for introducing CBDCs and GSCs are different. Some people see them as payment solutions that facilitate peer-to-peer or peer-to-peer business transactions, especially cross-border transactions, while others see them as a supplement to the large e-commerce ecosystem. Recently, after the COVID-19 crisis, governments of various countries are also exploring CBDCs as a quick and direct means of providing financial assistance to vulnerable groups (including those without bank accounts) during emergencies.

The digitization of currency and payment may impact the international financial system. Recently, breakthroughs in digital technologies such as cloud computing and cost reductions, as well as the popularization of mobile devices, have greatly increased the accessibility of individuals and businesses to payment tools previously used only by financial institutions (for example, real-time balance transfers of central banks) ). At the same time, distributed ledger technology (DLT) such as blockchain makes it possible to use digital tokens to transfer value on a peer-to-peer system without having to go through a central institution (for example, a commercial or central bank). It’s as simple as sending an email. Therefore, the current international currency structure may be reconfigured (Figure 1). This structure is based on the banking system connected to different locations and time zones around the world.

CBDCs and GSCs can reduce the cost of cross-border payments and make it easier for families and small businesses to obtain financial services. Based on a sample of 112 countries, the Bank for International Settlements (BIS) (2020, page 84) reported that the average total cost of a $200 bank cross-border remittance exceeds 10% of the value of the remittance. In 2019, remittances to developing countries exceeded US$550 billion, exceeding foreign direct investment and investment portfolio flows. At the same time, in some developing countries, such as sub-Saharan Africa, North Africa and the Middle East, the proportion of adults without a bank account exceeds 50% (BIS, 2020, p. 72), which prevents most people from accessing Banking services, including cross-border payments. Most of the above costs are service fees and cost recovery of financial intermediaries. Therefore, although it is difficult to quantify their benefits, CBDCs and GSCs clearly have the potential to significantly increase efficiency by flattening the multi-level correspondent banking structure and shortening the payment chain.

At the same time, foreign CBDCs and GSCs may make it more difficult for national authorities to implement independent monetary policies and control domestic financial conditions. By increasing the availability of domestic use of foreign currencies, CBDCs and GSCs may increase the pressure on currency substitution and increase the risk of currency mismatches. Without proper safeguards, they may promote illegal flows, making it difficult for supervisory authorities to implement management measures such as foreign exchange restrictions and capital flows. Although the application of digital technology in regulation and supervision (“RegTech” and “SupTech”) can enhance the authority’s ability to enforce compliance, its effectiveness still needs to be improved.

Accept that the scale and scope of CBDC and GSC will be affected by strong network effects, but will also depend on design features, national environment, legal framework and regulations. Digitization may disrupt the existing balance of cross-border currency use. Some of the attributes of these new forms of digital currencies may drive the adoption process in ways different from the existing dynamics. They reduce transaction costs by reducing their reliance on banks, broaden service channels through mobile devices, promote financial inclusion, and open up the possibility of providing complementary services on global-scale social networks and e-commerce platforms. Therefore, it is possible to imagine various specious adoption and use results. In addition, the rise of GSCs can be traced back to the era when the private sector played an important role in the currency field. Large technology companies not only provided goods and services, but also provided payment tools that could influence the monetary policies of many countries.

IMF: Explore CBDC and stablecoin usage scenarios and potential impact

Policy makers will face the challenge of dealing with the cross-border use of digital currencies. As a strategic response to the CBDCs and GSCs issued by foreign central banks and large technology companies, central banks can issue their own CBDCs, but if the local monetary policy framework lacks credibility, this may not help fight currency substitution. The central bank may have to adjust the use of fiscal and macroprudential policies to better respond to shocks when the effectiveness of monetary policy is compromised. For the central bank that decides to issue CBDCs, doing so may also help its currency to internationalize or obtain reserve currency status in some cases, but it may complicate its own monetary policy implementation, because foreign countries may use its CBDCs. Will increase the volatility of capital flows. With the emergence of new forms of digital currency, policymakers may be called on to coordinate legal and regulatory frameworks to manage data use and sharing, competition policy, consumer protection, digital identity and other important policy issues related to the digital economy.

This article explores the stylized scenarios of CBDCs and GSCs used across borders to illustrate and explore their possible meanings. This is not to predict specific results or judge their desirability. The hypothetical scenarios range from use in small-scale cross-border payments, to widespread adoption in some countries, to global adoption of a single GSC, or a few multi-polar worlds characterized by fierce competition between CBDCs and GSCs. Using these scenarios as a means of illustration, the analysis aims to clarify the following questions: What is special about these new forms of digital currencies that can bring a wide range of cross-border usage scenarios? What are the mechanisms by which cross-border adoption of CBDCs and GSCs may affect the transmission of monetary policy, financial stability, capital flow, and the demand and supply of international reserves? What potential policies can national authorities consider adopting to balance efficiency gains and risks? In addition, when the effectiveness of monetary policy is impaired, how do other policies need to be adjusted so that countries can respond to shocks?

The document provided the board of directors with an informal briefing on the relevance of cross-border digital currencies to international currency and financial stability. This is a preliminary attempt to resolve the complex interaction between the cross-border adoption and use of CBDCs and GSCs incentive mechanisms and their macro-financial effects. Although this article makes a preliminary analysis of the policy implications of this macro-financial effect, it does not make policy recommendations. Standardized policy discussions require further welfare analysis and broader public debate. In general, this article finds that CBDCs have not changed the texture of the economic power that leads to currency internationalization, because they are only digital forms of existing legal tender, but in terms of quantity, they can strengthen the incentives behind currency substitution and currency internationalization. . GSCs that do not represent independent valuation units are similar to CBDCs in terms of currency effects, but may affect financial stability because they may suffer from rounds of trust crises. GSC, which represents a new independent pricing unit, can also provide better financial services, but it poses a challenge to global governance, because the GSC issuer’s profit maximization goal may conflict with the public policy goal of maintaining currency and financial stability.

What are CBDCs and GSCs?

CBDCs and GSCs are new forms of digital currency, reflecting the latest developments in digital technology. CBDCs are a digital form of legal tender issued by the Central Bank. For the purpose of this article, we will focus on retail CBDC, which is defined as a widely accessible digital form of legal tender (Mancini-Griffoli et al., 2018; Group of 30, 2020). GSCs are stablecoins, a kind of private digital currency issued by large technology companies, and have the potential to be widely used (Figure 2). Stablecoins may be different from traditional electronic money schemes because they do not necessarily guarantee that they can be redeemed at a predetermined face value in the account unit. Although stablecoins are classified here, for the sake of convenience and explanation, being a digital currency does not mean that they are officially regarded as “currency” or “money” by IMF staff. The appropriate legal definitions of currency and money are discussed in Box 1.

IMF: Explore CBDC and stablecoin usage scenarios and potential impact

With the continuous advancement of digital technology, new digital currencies may be cheaper and faster than traditional electronic tools, especially cross-border payments. Compared with credit cards, CBDCs and GSCs do not incur expensive swaps or foreign transaction fees, partly reflecting that they do not require the multi-layered clearing and settlement infrastructure behind credit card transactions. In addition, they can be transferred in real time via a peer-to-peer system 24 hours a day, basically bypassing the correspondent bank relationship (Figure 1). He and others (2017) proposed a simple analogy that can help understand the nature of these new forms of digital currencies. Before the advent of the Internet, sending a letter in China was fundamentally different from sending a letter internationally. Prices are significantly different, infrastructure is different, and processing cross-border mail requires payment for shared international agreements, as well as packaging, tracking, and processing standards. This situation still applies to current cross-border payments (CPMI, 2020; FSB, 2020 b). In the Internet age, there is no difference between emails or text messages sent to domestic or foreign recipients; both require one click. News is news; with the rise of CBDCs and GSCs, payment will only be payment in the future, regardless of whether the payee is at home or abroad.

Private digital currencies differ in design and value stability, and so far, their use has been restricted. We emphasize two main types. The first generation of encrypted assets (such as Bitcoin) are priced in their own pricing unit, and their prices fluctuate greatly, which makes their value storage capacity very poor. Stable coins have become a less volatile version of traditional encrypted assets. Stablecoins seek to support their issuance by linking their valuation to fiat currencies or other existing assets, using assets (including assets denominated alone or as a basket of global official currencies) to support their issuance, or managing their unissued supply through the use of algorithms, To minimize price fluctuations. So far, neither encrypted assets nor stablecoins have reached the level of use of cash or established cashless payment methods.

Large technology companies appear to be preparing to issue GSCs. Individuals and companies increasingly rely on platforms provided by large technology companies to connect with each other and exchange goods and services. These companies that benefit from the huge number of users and the network effects brought about by bundling different product capabilities may issue stablecoins with large-scale application potential. For example, Facebook and its partners announced their intention to launch Libra, a blockchain-based digital currency that is fully backed by assets denominated in reserve currencies. Other large technology companies may follow suit. In the beginning, large technology companies may choose to link their GSCs to the existing legal reserve currency to generate trust in the stability of their value. However, with the adoption of globalization, GSCs may be decoupled from fiat currencies. They can become an independent account unit without any support other than the trust of the user, and the user can accept them as payment. The issuer can maintain its value by following a set of reliable rules or principles (such as the amount and speed of issuance, the level of interest paid or the fees charged), just like the central bank implements monetary policy, although not necessarily the same tools Or goal.

Central banks have not yet issued CBDCs, but many central banks are seriously considering issuing them. A recent BIS survey of central banks in 21 advanced economies and 45 emerging market economies (Boar and others, 2020) indicated that approximately 80% of central banks are engaged in CBDC-related work, and 40% of central banks have Analytical research progresses to concept experiment or proof. The motivation for issuing CBDC varies from country to country. According to the above report, the main reasons include: (I) provide alternatives to cash, and ensure that the public can use state-guaranteed payment methods; (II) reduce the size of the territory or inconvenient transportation The cost of cash processing by the country; (â…¢) promote inclusive finance, especially for people without bank accounts; (â…£) improve the efficiency and security of domestic payments, especially cross-border payments. The global potential applications of stablecoins issued by large technology companies may also promote people’s interest in CBDC. Finally, after the COVID-19 outbreak, CBDC is being considered as a means to quickly pay government support to households and businesses, and it is also a means of payment that is more hygienic than cash and meets the needs of social distancing (Auer, Cornelli and Frost, 2020).

Adoption and usage scenarios

Factors affecting the adoption of CBDC and GSC

The cross-border use of currency is divided into two categories: the use of currency for international transactions and the use of domestic currency issued by foreign entities. In the first category, international currency acts as a medium of exchange, store of value, and unit account, and is used for international trade, international finance, and foreign exchange reserves (Figure 3). In the second category, foreign currency replaces domestic currency for domestic transactions. This situation is usually called currency substitution. Below we review the factors that promote currency use in international transactions and in currency substitution. Annex 1 describes the current situation and proposes various indicators for the use of currencies internationally. Annex 2 provides typical facts about the degree, dynamics and durability of currency substitution.

Security, liquidity, trade links, financial relations and geopolitical factors explain why some currencies are used disproportionately in cross-border transactions. Price stability and confidence in the value of the currency (both stemming from the credibility of the monetary authority) are essential. Because these factors affect the role of currency as a unit of valuation and a store of value (Eichengreen and Mathieson, 2000; Hartmann and Issing, 2002). The higher the liquidity and development of a country’s financial market, the more likely it is that other countries will use its currency to intervene or value financial assets (Eichengreen, 1998). The greater a country’s share of world output and trade, the more likely it is that other countries will use the currency due to economies of scale (Eichengreen, 1998; Frenkel and Sondergaard, 1999; Frankel, 2000). The status of an international currency is also affected by the geopolitical relationship between the issuing country and the countries that adopt and use the currency (for example, Eichengreen et al., 2019).

IMF: Explore CBDC and stablecoin usage scenarios and potential impact

The use of international currencies is affected by strong network effects or externalities strengthened by the synergy between currency functions. A network effect occurs when the private value of using a service or product increases as the number of other users increases. Once a currency is established internationally, the fact that many people use it will increase the likelihood that others will adopt it. Synergies between the different functions of international currencies may strengthen the network effect of adoption. For example, the status of the US dollar as the main international currency for trade invoices and payments has enhanced the role of the US dollar in international finance, and vice versa. Therefore, from a dynamic perspective, once a currency is established as the dominant currency, it tends to be in a self-adjusting dominant position (He and Yu, 2016; Gopinath and Stein, 2018).

Currency substitution usually occurs under the background of imperfect domestic macroeconomic policies and lack of trust in policy institutions. High and unstable inflation hinders the ability of the national currency to stably store value. In the case of hyperinflation, the exchange medium of the national currency and the function of the unit of account will also be restricted, because households and companies aim to minimize exposure to rapidly depreciating currencies and prefer to switch the unit of account to avoid constant revaluation. Home price. Such inflation events are usually caused by the interaction of huge macroeconomic pressures and weak policy institutions (such as huge fiscal deficits and lack of central bank independence) (De Nicolo et al., 2005; Catao and Terrones, 2016; Kokenyne) Et al., 2010). Limited barriers to foreign exchange convertibility, government guarantees for foreign exchange-denominated debt, lower foreign exchange transaction costs, and lack of regulatory restrictions on banks and companies’ foreign exchange exposure have further increased the possibility of currency substitution (Burnside et al., 2001; Broda and Levy Yeyati, 2006; Garcia-Escribano and Sosa, 2011).

In addition to the above factors, certain inherent attributes of CBDC and GSC can also promote their adoption and use:

  • Reduce transaction costs. CBDC and GSCs have the potential to reduce the cost of cross-border payments by eliminating intermediaries and possibly simplifying compliance procedures. They can help reduce the transaction costs of securities issuance and trading through broader asset tokenization.
  • Easy to access. Obtaining foreign exchange can be a challenge, especially in rural areas of developing countries. Whether it is a physical transaction or access through a bank account, the prerequisite for foreign exchange access is physical infrastructure. CBDCs and GSCs may overcome these obstacles. In addition, especially if the issuer is a private company, it can invest in advance, with the specific goal of reaching a wider user base.
  • Obtain supplementary services or bundles. Specifically, stablecoins are not just a new type of currency: they can provide access to a wider range of service platforms. The evolution of China’s payment system shows how e-money providers are bundling services to promote use, and this may also happen to stablecoins issued by large technology companies. WeChat Pay combines electronic money transfer with its ubiquitous social media services, while Alipay connects its electronic money to China’s largest online retail website. In addition, the two major electronic money issuers both provide credit services to their customers. In the future, large technology companies such as Facebook may follow a similar model by issuing stable coins to bundle their existing social media and e-commerce services with payment services.

Legal regulations will seriously affect the use of CBDC and GSC. Although countries should not stifle innovation, they can change their legal framework to set boundaries for the role of CBDCs and GSCs. What is important is that the recipient country can decide to what extent the contract will be settled in a foreign currency or GSC. In addition, the treatment of a foreign CBDC in the receiving country may depend on the legal treatment of the CBDC in the issuing country (such as currency and legal tender status). In addition, when designing a CBDC, countries need to decide whether to allow non-residents to access the system that records CBDC and CBDC transfers. For GSC to operate as a means of payment in cross-border transactions, it must have legal certainty: this will require GSC to have a certain degree of uniformity in legal characteristics, making it a tool consistent with payment functions. In addition to the description of GSC, it is necessary to clearly define the rights of token holders and the status of issuers and intermediaries, and it is necessary to carefully study the private law issues that may affect the normal operation of GSC (see Box 1). Under all other conditions being equal, GSC, which provides higher clarity and protects the rights of coin holders, may be more adopted. The tax treatment of transactions involving GSC must be substantially similar to equivalent transactions involving legal tender (including cross-border transactions).

Regulatory frameworks also play a vital role in shaping the scale and scope of CBDC and GSC use. Currently, the regulatory environment in which new forms of digital currencies operate is fragmented. This leaves the possibility that households and companies can choose to use CBDC and GSC in countries with foreign exchange restrictions because they can help circumvent certain restrictions. At the same time, in view of the regulatory uncertainty handled by the GSC and concerns about the effective regulatory capabilities of the cross-border CBDC or the complete ecosystem involved in the GSC, regulatory agencies may make major concessions to allow these agencies to operate within their jurisdiction , Unless clearly stated its financial stability impact and applicable regulatory framework (G7 Working Group, 2019).

What-if scenario

This article gives some hypothetical scenarios for the use of CBDC and GSC (Figure 4) to help illustrate their potential macro financial impact. These scenarios were not chosen because they were possible or desirable; instead, they were designed as stylized examples to help analyze the macro-financial impact of the adoption of CBDC and GSC to varying degrees. These scenarios consider various aspects: for what purpose (that is, the function of currency) CBDC and GSC are used, how much they are used in various countries, to what extent they replace local currencies and the type of issuer-whether public offering ( CBDC) or private (GSC), because this may require different preconditions and have different meanings.

Scenario 1: Use the niche for cross-border payments. Due to its low cost and inefficiency, or due to legal and regulatory restrictions on the purpose and amount of international transfers, CBDC or GSC is used as the preferred means of small transactions, such as cross-border remittances. CBDC or GSC will not be held for a long time-in most cases during the transaction, and in some cases as a store of value. CBDC or GSC will be converted into local currency for domestic purchases, CBDC or GSC will not replace local pricing units.

  • The convenience and accessibility of CBDC and GSC make them a trading currency. For example, CBDC and GSC do not need to open bank accounts holding foreign currency balances, but allow foreign residents to conduct open transactions without a bank account, which is difficult to obtain in many countries due to compliance requirements or other costs. Because they can be transferred on a 24-hour peer-to-peer system, their use simplifies the multi-layer counterpart bank structure, shortens the payment chain, reduces transaction time, and promotes competition among service providers. As a result, cross-border payments may become cheaper and more inclusive, especially for small remittances.

IMF: Explore CBDC and stablecoin usage scenarios and potential impact

Scenario 2: Some countries have higher currency substitution rates. Foreign CBDC or GSC linked to existing legal currencies will cause countries with high inflation rates, high volatility and unstable exchange rates to use foreign currencies more. In these countries, the use of CBDC or GSC is very intensive and has greatly replaced the national currency: as a store of value (itself or to acquire assets in that currency), as a means of payment for many but not all transactions (including some regional cross-border trade), As a common (but not necessarily universal) pricing unit. In addition, even in countries with credible policy frameworks, the use of global service centers may be significant because they can facilitate transactions related to certain e-commerce or social networking platforms. The platform may not need to use GSC, but it can be encouraged through incentives (for example, if you use GSC, the prices of goods and services on the platform will be lower).

  • Macroeconomic conditions and the degree of development of financial markets are critical to the adoption of CBDC and GSC. In countries that are struggling with less credible monetary policy systems and poor price stability experiences, the emergence of central settlement systems and global settlement systems may exacerbate currency substitution problems due to better accessibility. In this case, an increase in currency substitution may not necessarily lead to a decrease in welfare. Gulde and others (2004, p. 4) pointed out that “When comparing the financial vulnerabilities of dollarized and non-dollarized systems, it is important to show that dollarization itself is largely a function of preventing risks. “Countries with less developed payment systems may adopt more foreign CBDC and GSC as a way to develop better payment and settlement services by leaps and bounds, even for local transactions.

2 Scenario 3: Global adoption. A single GSC is widely adopted in many countries and replaces local currency as a store of value, a means of payment and a unit of valuation; it is also widely used in international transactions. GSC is an independent pricing unit that is used as a means of payment on e-commerce and/or social platforms across multiple countries. Its value can be maintained by the issuer’s commitment to a set of credible rules or principles. For example, it may establish “price stability rules” for a basket of products sold on the platform of this large technology company.

  • This may happen if a large global high-tech platform decides to launch GSC for its large customer base all over the world. In this case, adoption will be driven by the network externalities associated with the existing large customer base and the synergy between the tokens provided by the platform and other goods and services. Such GSCs can initially be issued for assets denominated in existing reserve currencies. Given the large customer base of large technology platforms, GSC can be quickly adopted globally. Payment tools launched specifically for its customer network will help strengthen its business model. With the popularity of GSC, network effects will take over: agents will begin to invoice contracts in GSC, and financial intermediaries will begin to collect deposits and provide loans through GSC-denominated contracts. At a certain stage, once the adoption rate reaches a certain critical level, it may no longer need to be linked to the existing reserve currency to generate trust in the value of GSC, and GSC can become legal tender.

Scenario 4: Multi-polarization is adopted globally. This is a competition scenario between several major CBDCs and GSCs representing independent accounting units. Unlike a single GSC, which is mainly used for international transactions and payments, and for domestic use worldwide (as described in scenario 3), some CBDCs and GSCs are used internationally for both domestic and international transactions. In the case of CBDCs, there may be “money blocs” in which countries choose a common CBDC for international and domestic transactions. For GSCs, there may be a “digital currency area”, that is, the use of stablecoins is not determined by geographic boundaries, but by the boundaries of the e-commerce and/or social platforms that use it. Such a digital currency area can be defined as a network in which digital payments and transactions are made by using currency specific to the network. In other words, either the payment instrument operated by the network can only be used among internal participants; and/or the network uses its own pricing unit, which is different from the existing official currency (Brunnermeier and others, 2019c). The third situation is that there may be currency competition between a few major CBDCs and GSCs.

  • This situation may be the result of strategic responses of central banks and large technology companies in the currency competition game in the digital age. It is expected that the central bank of the major reserve currency will issue CBDC or the global leading large technology company will issue GSC, and other central banks and large technology companies may also launch their own CBDC and/or GSC. Through interoperability, users of specific technologies or systems can easily interact with users of other technologies or systems, greatly reducing exchange costs. The persistence of first-mover advantage and established dominant standards may no longer be so strong. Based on this idea, the rise of CBDC and GSC may prove to be a shock to accelerate the transition to a multipolar world of reserve currencies. In fact, in certain historical periods, several major currencies seem to have played important international roles at the same time (Eichengreen and Flandreau, 2009; Eichengreen, Mehl, and Chitu, 2018).

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