In his book The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, Cornell University professor Eswar S. Prasad explores how digital currencies and financial technologies are reshaping areas like consumer banking, monetary policy, and international payments. Speaking with the International Monetary Fund (IMF), Prasad discussed both the benefits and risks associated with digital money.
IMF: Is cash likely to disappear?
Prasad: Digital payments, with their convenience for consumers and businesses, make it unlikely that cash will endure. In China, Alipay and WeChat Pay dominate the economy with low-cost digital payments, usable even for small purchases like fruit from a street vendor. Similarly, advanced economies like Sweden rely on private-sector digital payment solutions.
IMF: Could cryptocurrencies like Bitcoin replace cash for daily transactions?
Prasad: Bitcoin has not proven effective as a medium of exchange due to its volatile value. For example, the same bitcoin might buy a full meal one day but only a small coffee the next. It’s also relatively slow and cumbersome to use.
IMF: Why are countries exploring central bank digital currencies (CBDCs)?
Prasad: Developing countries aim to improve financial inclusion since many people lack access to banking services and digital payments. In places like Sweden, the focus is on ensuring stability. The Riksbank envisions the e-krona as a backup for private payment systems.
IMF: What’s driving China’s interest in a digital yuan?
Prasad: The Chinese government seeks to counter the dominance of two major payment providers—Alipay and WeChat Pay—that stifle competition. A digital yuan could increase competition and complement existing systems.
IMF: How could digital currencies impact central banks’ ability to manage inflation and employment?
Prasad: If all citizens had Federal Reserve accounts, it would simplify operations like stimulus payments. For example, during the pandemic, many U.S. households received checks or prepaid cards, some of which were lost or misused. Digital currencies could streamline such processes.
IMF: Could CBDCs combat tax evasion and crime?
Prasad: Without cash, transactions—even small ones like paying a babysitter—are more likely to be reported. This would increase tax revenues and reduce the use of cash for illicit activities such as drug trafficking or money laundering.
IMF: Could CBDCs harm private banks and payment providers?
Prasad: A government-run low-cost digital payment system could outcompete private providers. Additionally, commercial banks might lose deposits to central bank accounts, especially during economic uncertainty, impacting their ability to provide credit.
IMF: How can this risk be mitigated?
Prasad: A dual-tier CBDC system, like those tested in China and Sweden, may work better. In this setup, central banks provide the infrastructure and digital tokens, while commercial banks manage the digital wallets.
IMF: Could the digital yuan threaten the U.S. dollar’s dominance?
Prasad: Beyond economic size, trust in a country’s institutions, such as the rule of law and an independent central bank, underpins currency dominance. The U.S. still leads in these areas.
IMF: Why is the U.S. Federal Reserve cautious about CBDCs?
Prasad: The U.S. has payment system issues, including high credit card fees, which burden merchants and consumers. A CBDC could improve financial inclusion slightly, but the Fed is already working on initiatives like FedNow to enhance payment efficiency.
IMF: Do digital currencies pose societal risks?
Prasad: Authoritarian governments could use CBDCs for population surveillance, while even well-meaning governments might misuse them to enforce social policies. This could undermine trust in central banks and the credibility of money itself.