What is the impact of digital currencies on the global economy?
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Research Analysis by Consensus
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Introduction
Digital currencies, including central bank digital currencies (CBDCs) and cryptocurrencies, are transforming the global economy. Their impact spans various aspects, from economic growth and financial stability to monetary policy and international trade. This synthesis explores the key insights from multiple research papers on the impact of digital currencies on the global economy.
Key Insights
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Economic Growth and Financial Inclusion
- Digital currencies can enhance economic growth by increasing financial inclusion and reducing transaction costs, which promotes business activities and investments .
- The introduction of digital currencies can lead to a more inclusive economy by attracting unbanked populations into the financial system, thereby reducing the shadow economy and tax crimes .
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Impact on Traditional Banking and Financial Stability
- The issuance of CBDCs is not likely to threaten financial stability and may even promote bank lending by increasing competitive pressure and financial inclusion.
- Digital currencies can reduce systemic financial risks by lowering leverage ratios and enhancing the stability of the financial system .
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Monetary Policy and Regulation
- Digital currencies will significantly impact the structure and functions of central and commercial banks, as well as national and transnational payment systems, necessitating changes in monetary policy and regulatory frameworks .
- The controlled issuance of digital currencies can help manage inflation and support the effectiveness of monetary policy by providing a high level of control over monetary transactions .
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Cross-Border Transactions and International Monetary System
- Digital currencies can make cross-border payments cheaper and quicker, reducing frictions in global capital flows. However, this could also lead to increased capital flow and exchange rate volatility, particularly affecting emerging market economies.
- Despite the potential for digital currencies to facilitate international trade, they are unlikely to significantly alter the dominance of major fiat currencies like the US dollar, which is supported by strong institutional foundations .
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Technological and Economic Implications
- The rise of cryptocurrencies like Bitcoin could challenge traditional fiat currencies and introduce new dimensions to global finance, including regulatory challenges and the need for robust financial infrastructure .
- Digital currencies, born from technological advances, do not fundamentally change the nature of credit money but require a balanced approach to ensure stability in both physical and money markets.
Conclusion
Digital currencies are poised to bring about significant changes in the global economy. They promote economic growth and financial inclusion, enhance financial stability, and necessitate changes in monetary policy and regulatory frameworks. While they offer benefits such as reduced transaction costs and improved cross-border payments, they also pose challenges, including potential volatility in capital flows and the need for robust financial infrastructure. Despite these changes, the dominance of major fiat currencies is likely to remain due to their strong institutional foundations.
Sources and full results
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