This picture will be mintable soon

Digital Currencies & Monetary Policy in the Digital Age

In Part 1, we uncovered the most pertinent qualities of money from a historical perspective while also looking ahead at the future of financial technologies like cryptos and CBDCs. For part 2, we get a snapshot of monetary policy with respect to digital currencies. The effects of three types of digital money — cryptocurrencies, stablecoins, and central bank digital currency (CBDC) – on monetary policy cannot be ignored. Cryptocurrencies are unlikely to constrain monetary policy in the near future due to their low adoption and perceived lack of moneyness. Essentially, moneyness refers to a currency’s intrinsic value, thus, people still feel that cryptocurrency has no innate value to become money. Stablecoins, on the other hand, have the potential to grow to critical mass, particularly if they are backed by significant corporations with a large user base (BlackRock will manage the cash reserves of the $50 billion stablecoin USDC). CBDC would be a publicly available digital version of the national currency with significant implications for monetary policy and financial stability. Central bankers currently believe that a persuasive monetary policy motive is lacking or are concerned about the possibility of financial stability disruption. That said, more than 80% of Central Banks are thinking of launching CBDCs, or have already done so.


As you will indubitably learn in both part 1 and part 2, we’re unraveling the complexities of money’s evolution, starting with its history before moving on to a vision of what it could offer in the future so we can understand what currently limits us in the present. We are doing this through the spectroscope of regulation and the variegated hues it can take.


Research into CBDCs is not merely an intellectual curiosity, it will define the rest of the 21st century. Monetary policy is at a crossroads in the face of a techonomy. CBDCs (and much like other cryptocurrencies) must not cause any harm. They should not, in particular, become a source of financial turbulence that obstructs the transmission of monetary policy on a global scale. As countries prepare to potentially issue CBDCs, it should rely on thoughtful analysis to guide policy trade-offs and design decisions.


According to Chainanalysis, the 2021 Global Crypto Adoption Index saw worldwide adoption jump over 880% with P2P platforms driving cryptocurrency utility in emerging nations. 


When the Internet first became widely available over twenty years ago, a group of notable economists and central bankers pondered if improvements in information technology might render central banks outmoded. While those prophecies have yet to materialize, the growth of crypto assets has reignited the conversation. These assets could one day be used as a form of payment and possibly as units of account, reducing the requirement for fiat currencies and central bank money. It’s time to re-examine the topic of whether monetary policy would still be effective in the absence of central bank money.

Is Monetary Policy Limiting Adoption? 

To date, the monetary policy implications of cryptocurrencies are extremely restricted. This is evident in the fact that, in comparison to traditional monetary aggregates, they have a small part of global market capitalisation. Because of their low acceptance (but increasing) and significant volatility, this view is unlikely to alter anytime soon (although the conversations are becoming more constructive). From the standpoint of financial stability, cryptocurrencies have not been a source of concern because the financial services sector’s exposure is modest, though this may change in the near future depending on legislative changes. And it’s already starting to change with the IPO of Coinbase, for instance, with the rise of investments into the space, the potential for systemic risk grows as the industry gets sewn into the fabric of global economics.

However, continued technical advancements may be able to alleviate some of these flaws. Central banks must continue to implement effective monetary policies to stave off possible competitive pressure from crypto assets. They can also take advantage of the qualities of crypto assets and the underlying technology to improve the appeal of fiat currencies in the digital era.

Potential Advantages of Crypto to the Monetary System

Because supply is limited, some crypto assets, such as Bitcoin, have a low risk of inflation. Contrarily, they are devoid of three essential tasks that stable monetary regimes are expected to provide: insulation from structural deflation, the capacity to react flexibly to transient shocks in money demand and hence regulate the business cycle, and the power to act as a lender of last resort. With this perspective in mind, let’s imagine the following- can SDRs (Special Drawing Rights) be issued via blockchain? Would a smart AI that determines the algorithmic systemic risk of what Dora Haraway describes as “the detumescing project of a self-making and planet-destroying” Homo sapiens be able to preclude the impending doom? We can only imagine.

Crypto assets prove advantageous as a medium of exchange. They provide much of the anonymity of cash while also allowing transactions over vast distances and allowing for more divisible transaction units. Crypto assets are especially appealing for micropayments in the sharing and service-based digital economy because of these qualities.

Crypto asset transactions, unlike bank transfers, may be cleared and completed rapidly with no need for an intermediary. The benefits are particularly apparent in cross-border payments, which are expensive, time-consuming, and obscure. By circumventing correspondent banking channels, new services based on distributed ledger technology and crypto assets have reduced the time it takes for cross-border payments to reach their destination from days to seconds.

As a result, we can’t rule out the possibility that some crypto assets may become more broadly adopted and perform more of the duties of money in some regions or private e-commerce networks in the future.

Moreover, the emergence of crypto assets and increasing adoption of distributed ledger technology could signal a transition away from account-based payment systems toward value or token-based payment systems. The transmission of claims in account-based systems is documented in an account with a middleman, such as a bank. Value- or token-based systems, on the other hand, entail the simple transfer of a payment object such as a commodity or paper cash. The transaction can go through if the value or legitimacy of the payment item can be validated, regardless of whether the intermediary or counterparty is trusted.

Such a transition could herald a transformation in how money is formed in the digital age, from credit money to commodity money, springing us back to the Renaissance! Money was primarily built on credit connections in the twentieth century, for example: central bank money, or base money, symbolizes a credit relationship between the central bank and citizens (in the case of cash) and the central bank and commercial banks (in the case of reserves). Demand deposits (commercial bank money) indicate a credit relationship between the bank and its customers. Crypto assets, however, have no credit relationship, are not the liabilities of any corporations, and are more akin to commodity money in nature. Economists are still arguing the origins of money and why monetary systems appear to have switched between commodity and credit money over time. If crypto assets do truly lead to commodity money playing a larger role in the digital era, demand for central bank money is expected to fall.

But, in terms of monetary policy, would this adjustment be significant? Would a drop in demand for central bank money make it more difficult for them to control short-term interest rates? Economists disagree on whether large changes to central bank balance sheets would be required to move interest rates in a future where central bank liabilities were no longer used for settlement. In a crypto world, would the central bank have to acquire and sell a lot of crypto assets to move interest rates?

Whatever the differences, the underlying worry is the same: The only real question about such a scenario is how much the central banks’ monetary actions would matter. Essentially, if central bank money is no longer the unit of account for most economic activity, and those units of account are instead provided by crypto assets, the central bank’s monetary policy is made impertinent.

What Should Central Banks Do in This Situation? 

How can they protect fiat currencies from the competitiveness that crypto-assets may bring? Initially, they should keep working to make fiat currencies more reliable and stable units of account. The basics of the monetary framework.

Technology can also help with monetary policymaking: with big data, artificial intelligence, and machine learning, central banks will be able to enhance their economic projections. Although it is evident that CBDC would have implications for monetary policy, monetary transmission, and financial stability, monetary policy problems have not been central in these talks so far.

A CBDC would be issued by the central bank and denominated in the official currency unit, unlike cryptocurrencies and stablecoins. Reserves are digital, but they are not fully available because they can only be held on a central bank account by banks. Today, the central bank’s only asset that may be used by anyone is banknotes, which are not digital.

The impact of CBDC on monetary policy and financial stability will be determined by how fast and widely it is embraced. CBDC’s design aspects are crucial in this context since they define its attractiveness and hence directly influence prospective demand. Nonetheless, opinions differ on whether CBDC is required or desirable in terms of monetary policy or financial soundness. For two reasons, a rising amount of evidence reveals that this viewpoint is not so straightforward. Firstly, the risks that CBDCs represent to bank intermediation are highly dependent on central banks’ decisions.

Second, the issuing of CBDCs could have widescale benefits to the entire financial system.

As cash demand declines, issuing CBDCs could guarantee that sovereign money continues to play a role in bolstering faith in the monetary and payment infrastructure. A CBDC would maintain the value of money and monetary autonomy by continuing to supply the reference value for all kinds of privatized money in circulation. Strong network externalities can bestow monopoly power on private payment networks, which could be mitigated by central bank digital money.

Central banks will play a critical role in establishing the future macrofinancial landscape, including the implementation of digital money and the extent to which it influences the existing fiscal system. Hence, whether we like it or not, this discussion is relevant to us all, whether we are interested in only fiat, cryptos, NFTs etc., we are all implicated in the future decisions of central banks.


Electronic payments are expanding, and the digital payments market is rapidly evolving. The implications of these various kinds of digital money on monetary policy are tentacular, that is, all-encompassing. Cryptocurrencies are unlikely to constrain monetary policy in the near future due to their low adoption and lack of moneyness. On the flip side, stablecoins have the potential to grow to critical mass, particularly if they are backed by major enterprises with a wide customer base. The central bank’s digital currency would be a publicly available digital representation of the official money. While increasing the number of users of digital central bank money may not appear to be a huge change, the implications for monetary policy and financial stability could be substantial for us all.

In the digital age, central banks have both obstacles and opportunities. Inside a digital, sharing, and decentralised service economy, central banks must preserve public trust in fiat currencies in order to stay in the game. They can stay relevant in the digital economy by offering more stable units of account than crypto assets and making central bank money appealing as a medium of trade.

Stefan Muriuki
Stefan Muriuki