The Digital Currency Revolution

For many years, the world has been dominated by the US Dollar, and it has played a central role in the global currency system, influencing trade, finance and capital flows worldwide. I explore how this system is changing in my new book, The Digital Currency Revolution, written with Lourdes Casanova, John Ninia and Sharwari Pandit.

Today, we’re moving into a very different era, as digital money, sanctions risk, de-dollarization pressures and the growing role of emerging markets begin to alter how currencies are used and understood. Currencies are no longer just a background factor in the global economy. They have become a major source of both opportunity and risk.

Inflation, geopolitical fragmentation, higher interest rates and new digital payment systems have changed how payments are made and even how people choose to keep their wealth. For a long time, the world ran on a fairly fixed set of expectations about currencies. Those expectations are now changing. Central banks are experimenting. Governments are using financial systems as strategic tools. And technology is creating real alternatives to traditional money. Emerging markets have lived with currency volatility for decades. Now, the developed world is experiencing it too.

We wrote this book to explain the new developments in currencies, including central bank digital currencies (CBDCs), cryptocurrencies and the wide range of payment systems that are now emerging. The global currency system is being reshaped in real time, and understanding these changes is essential to protecting wealth and spotting investment opportunities.

One of the big surprises for us was how many central banks around the world were researching or have already issued a CBDC. In the Bahamas there is the Sand Dollar. Nigeria’s central bank has issued the eNaira. China has the digital yuan, known as the e-CNY. India has the digital rupee. Russia the digital ruble. Lithuania has BCoin. The Eastern Caribbean Central Bank has Dcash.

The reason for this intense activity by central banks stems from the growing influence of cryptocurrencies and digital payment systems that could bypass central bank controls. The success of Bitcoin is an indicator of the threat to central bank dominance. Importantly more and more people are questioning central banks’ control of money supply and how the growth of money supply leads to inflation and a loss of buying power on the part of people using fiat currencies. Supporters of cryptocurrencies point to how assets like Bitcoin have, at times, appreciated in value outpacing the US dollar and other fiat currencies.

The contrasting approaches to CBDCs are exemplified by the US and China. While the US has rejected the establishment of a CBDC, China has embraced it. One reason is that the US does not want the traceability of a CBDC to impinge on personal freedoms. In China, authorities are drawn to the ability of a CBDC to digitally control and track how the currency is distributed, how it is spent and when it is used. This gives overwhelming oversight over individuals’ financial activity.

Instead, the US has passed the Genius Act, which is a comprehensive federal digital currency legislation focused specifically on stablecoins, which are digital tokens designed to maintain a stable value by being backed by US dollar or US Treasury securities. The law aims to protect users from scams and reserve shortfalls. One advantage of stablecoins is that their stability makes them useful for payments, trading and remittances. They offer the speed of crypto without the big price swings seen in Bitcoin and other digital currencies.

There are three main types of stablecoins: those backed by real currency, those backed by other crypto assets and algorithmic stablecoins using software rules to maintain their peg. The stablecoin market is now used across payments, trading, remittances and institutional finance, with millions of users worldwide. It has doubled in the last two years to over USD 250 billion. But one stablecoin, TerraUSD, lost its dollar peg in 2022, wiping out around $45 billion in value. That collapse strengthened the case for regulation. Not only the US, but the European Union, Hong Kong, Bahrain and others have now introduced stablecoin regulations.

In short, stablecoins are moving from a largely unregulated crypto innovation into a regulated, more established part of the financial system, bringing both great opportunities (faster, cheaper payments) and serious challenges (risk management, consumer protection, and regulatory harmonization).

Still moving through the legislative process are two other bills: the Clarity Act, which seeks to define how different digital assets are regulated, and the Anti-CBDC Surveillance State Act, which would prohibit the Federal Reserve from issuing a CBDC without congressional approval.

By this broader set of policies, the US wants to ensure that the US dollar remains a dominant global payment currency. That dominance, however, is being threatened by China’s work with the BRICS countries, Brazil, Russia, India, China and South Africa, to establish a decentralized digital payment network designed to be blockchain-friendly and to operate independently of US-dominated financial infrastructure. This would allow countries to settle trade without converting into US dollars.

The idea is to replace SWIFT, the global messaging network used for most dollar-linked international transfers. Under such a system, transactions between member states could be done in national currencies or digital central bank currencies such as China’s e-CNY. One limitation of this approach is the lack of a single BRICS digital currency that could directly displace the US dollar. Even so, it gives those countries a way to reduce their exposure to US sanctions.

The actions of the US and China are just two examples of how the global currency landscape is transforming very rapidly. As the use of AI becomes more widespread, these developments are likely to gather pace and deserve our close attention.

If you want to learn more, pick up a copy of our book The Digital Currency Revolution.

https://link.springer.com/book/10.1007/978-3-032-02819-8

https://www.amazon.com/Digital-Currency-Revolution-Central-Currencies/dp/3032028183