New digital currencies that transcend national borders could affect the nature of currency competition, the architecture of the international monetary system and the role of government-issued money, says a BIS working paper.
This week, the value of Bitcoin, Ethereum and others plummeted in the wake of a clampdown in China, where the government has banned banks and payment firms from providing services related to cryptocurrency transactions.
At the same time, Beijing is powering along with the roll out of its own CBDC programme as it seeks to keep control in the new digital money era.
As governments, regulators and private firms grapple with the myriad potential digital money futures, the new BIS working paper offers up some views on the "ongoing digital revolution [that] may lead to fundamental changes to the traditional model of monetary exchange".
First, say the digital currencies will unbundle the traditional functions served by money (ie store of value, medium of exchange and unit of account), creating fiercer competition among currencies.
Second, digital money issuers will try to differentiate their products by re-bundling monetary functions with things such as data gathering and social networking services. For example, digital currencies could be linked to a particular digital network rather than to a specific country. This raises the risk of "digital dollarisation", in which the national currency is supplanted by the currency of a systemically important digital platform.
Third, digital currencies affect the competition between private and public money. Cash could disappear, and payments could centre around digital platforms rather than banks' credit provision. To tackle this, governments may need to offer CBDCs in order to retain monetary independence.
Read the full paper: