The digitalisation of money

BIS Working Papers  |  No 941  | 
19 May 2021



The ongoing digital revolution may lead to fundamental changes to the traditional model of monetary exchange. Digital currencies facilitate instantaneous peer-to-peer transfers in a way that was previously impossible. New currencies that transcend national borders could redefine how payments and user data interact. They could affect the nature of currency competition, the architecture of the international monetary system and the role of government-issued money.


This paper discusses the key questions and economic implications of digital currencies. It discusses how digital currencies could unbundle the traditional roles of money, lead to digital currency areas that cover multiple countries, and move payments away from banks' credit provision towards digital platforms. These changes could influence the transmission of monetary policy and necessitate the introduction of central bank digital currencies (CBDCs).


First, 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 (ie currency) by re-bundling monetary functions with eg data gathering and social networking services. In combination with digital connectedness, new currencies could lead to digital currency areas linking the currency to the use of 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. Governments may need to offer CBDCs in order to retain monetary independence.


The ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms. Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account.

JEL-classification: E42, E52, F33
Keywords: digital money, digital currency area, digital dollarization, currency competition