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1、Crypto assets and central bank digital currenciespotential implications for developing countriesGeneva,2023ii 2023,United NationsThis work is available through open access,by complying with the Creative Commons licence created for intergovernmental organizations,at http:/creativecommons.org/licenses
2、/by/3.0/igo/.The findings,interpretations and conclusions expressed herein are those of the author(s)and do not necessarily reflect the views of the United Nations or its officials or Member States.The designations employed and the presentation of material on any map in this work do not imply the ex
3、pression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country,territory,city or area or of its authorities,or concerning the delimitation of its frontiers or boundaries.Mention of any firm or licensed process does not imply the endorsement of the Uni
4、ted Nations.Photocopies and reproductions of excerpts are allowed with proper credits.This publication has not been formally edited.United Nations publication issued by the United Nations Conference on Trade and DevelopmentUNCTAD/GDS/2023/1eISBN:978-92-1-002617-8Crypto assets and central bank digita
5、l currenciespotential implications for developing countriesiiiACKNOWLEDGEMENTSThis policy review was written by Jrg Mayer,Senior Economic Affairs Officer of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development(UNCTAD).As part of a peer re
6、view process,comments on and suggestions for the publication were received from the following UNCTAD staff:Stephanie Blankenburg,Kristine Fitzpatrick,Penelope Hawkins,Nicolas Maystre,Daniel Munevar and Daniela Prates.Comments and suggestions were also received from Barbara Fritz(Free University Berl
7、in),Heike Joebges(University of Applied Science(HTW)Berlin),Bianca Orsi(Leeds University)and Marina Zucker Marquez(School of Oriental and Asian Studies,London).The main findings of the publication were presented at the panel discussion entitled“Policy Perspectives:Road to Policy Consensus on Crypto
8、Assets”,held on 23 February 2023,at the Group of 20 Finance and Central Bank Deputies Meeting in Bengaluru,India.ivCrypto assets and central bank digital currenciespotential implications for developing countriesEXECUTIVE SUMMARYThis Policy Review provides an accessible,yet academically informed,disc
9、ussion of main implications of crypto assets for the monetary,financial and payments systems in developing countries.It asks four main questions:(i)what are the trends and drivers of crypto adoption,and which developing countries have been concerned the most;(ii)what do the economics of crypto asset
10、s imply for the ease of payments,financial inclusion,privacy,illicit financial flows,and currency substitution,as well as the architecture of the international monetary system(IMS);(iii)how can regulation shape the evolution of crypto adoption and what solutions can central bank digital currencies(C
11、BDCs)and fast retail payment systems provide;and(iv)are the monetary,financial and payments systems in developing countries ripe for embracing crypto assets?Crypto adoption has been strong in developing countries,probably because their financial systems tend to be narrower and less regulated,their m
12、acroeconomic stability lower,and their population younger and therefore more digitally savvy.The Policy Review recognizes that crypto assets promise to solve long-standing problems of financial markets in fostering financial inclusion and providing efficient,secure,and affordable monetary transfers,
13、while preserving cash-like privacy.Examining the economics of crypto assets,it,however,shows that most of these promises are elusive.Cryptocurrencies have no intrinsic value which,combined with their sizable volatility,makes them unsuitable as a unit of account,means of payment and store of value.Be
14、liefs in their capacity to increase financial inclusion,reduce costs of remittances,and ease access to investment finance and export credit may,nonetheless,draw developing countries towards crypto adoption.However,any substitution of national sovereign currencies by crypto assets can jeopardize fina
15、ncial stability and the effectiveness of monetary policy,reduce the effectiveness of capital controls,pose risks to countries monetary sovereignty and,through the pseudonymous character of crypto assets,facilitate illicit financial flows.Some of these challenges can be addressed by regulation,aimed
16、at ringfencing existing financial systems,protecting retail users,and bringing crypto exchanges under Know-your-customer(KYC)and Anti-Money Laundering/Combating the Financing of Terrorism(AML/CFT)requirements.Others,such as improving financial inclusion and monetary stability,as well as ensuring sec
17、ure and transparent access to public money could eventually be addressed by CBDCs.However,given the many technical and policy challenges associated with CBDCs,developing countries may consider the potential of fast retail payment systems and improved auxiliary digital infrastructure to provide more
18、rapidly available financial solutions.Crypto assets and central bank digital currenciespotential implications for developing countriesvLIST OF ABBREVIATIONSAML/CFT Anti-Money Laundering/Combating the Financing of TerrorismBCBS Basel Committee on Banking SupervisionBIS Bank for International Settleme
19、ntsBOJ Bank of JamaicaCBB Central Bank of BrazilCBDC Central Bank Digital CurrencyCEMAC Communaut conomique et Montaire de lAfrique Centrale(Central African Economic and Monetary Community)CFTC Commodities Futures Trading CommissionCPMI Committee on Payments and Market InfrastructuresDLT Distributed
20、 ledger technologyESMA European Securities and Markets AuthorityFATF Financial Action Task ForceFRPS Fast Retail Payment SystemsFSB Financial Stability BoardIFFs Illicit Financial FlowsIMF International Monetary FundIMS International Monetary SystemGFC Global Financial CrisisKYC Know-your-customerMi
21、CA Markets in Crypto AssetsNPCI National Payments Cooperation of IndiaPBOC Peoples Bank of ChinaP2E Play to EarnP2P Peer to PeerRBI Reserve Bank of IndiaSDGs Sustainable Development GoalsSEC Securities and Exchange CommissionSMEs Small-and Medium-Sized EnterprisesSSA Sub-Saharan AfricaUEMOA Union Ec
22、onomique et Montaire Ouest Africaine(West African Economic and Monetary Union)UPI United Payments InterfaceviCrypto assets and central bank digital currenciespotential implications for developing countriesTABLE OF CONTENTS1.Introduction.12.Trends and drivers of crypto adoption.3(i)Trends in crypto a
23、doption:some statistical evidence.3(ii)Potential drivers of crypto adoption.63.The economics of crypto assets.8(i)Crypto assets and the architecture of monetary and payment systems.8(ii)Crypto assets and currency substitution.124.Regulating crypto assets.165.Central Bank Digital Currencies.216.Concl
24、usions and suggested policy recommendations.28References .30Appendix 1:Drivers of crypto adoption an econometric exercise.35Appendix 2:Experiences with fast retail payment systems in selected developing countries.41Appendix 3:Experiences with CBDCs in selected developing countries.42Crypto assets an
25、d central bank digital currenciespotential implications for developing countries11.IntroductionMonetary and financial systems have become exposed to privately issued digital representations of value with monetary characteristics that rely on encryption,such as distributed ledger technology(DLT),and
26、are generally known as crypto assets.1 The rapidly expanding crypto asset sphere comes mainly in two forms:cryptocurrencies(e.g.,Bitcoin)and stablecoins(e.g.,USD Tether).2Advocates of crypto assets promise an emancipation from State control and financial institutions,combined with solving the long-s
27、tanding problems of monetary and financial systems in ensuring efficient,secure,and affordable monetary transfers,and fostering financial inclusion,while preserving cash-like privacy.The use of crypto assets has been driven by low trust in State regulation and banks following the Global Financial Cr
28、isis of 2008(GFC),the development of digital technology(such as cloud computing and blockchain),and an expansion of digital payment systems and related infrastructure(e.g.,pre-paid cards,e-wallets,or web-based services).Expected rapid high returns on crypto asset holdings and increased online shoppi
29、ng and contactless payment during the Covid-19 pandemic further pushed their use.Although ultimately not realized(e.g.,Pistor,2021;Prasad,2021:168175),the announcement in June 2019 by Facebook(now Meta)and its partners to launch a payments system based on a global stablecoin(Libra,then Diem)provoked
30、 steeply increased interest by central banks in considering Central Bank Digital Currencies(CBDCs).CBDCs(e.g.,Sand Dollar,e-Naira)are digital forms of sovereign currencies,which can help to improve financial inclusion,address risks posed by crypto assets,and help safeguard consumer protection,financ
31、ial stability,and monetary sovereignty(e.g.,Powell,2020;BIS 2022a).The collapse of various crypto assets in May 2022 and crypto exchanges in November 20223 triggered a sizeable reduction in crypto asset valuation.These events shared characteristics of the GFC,such as speculative bubbles based on sup
32、posedly high-yielding low-risk assets,and sizable losses by retail investors(Cornelli et al.,2023).However,financial turmoil remained of a much smaller scale,probably because of the still relatively small size of the crypto world and limited interoperability between individual crypto assets.At the s
33、ame time,it dampened beliefs in the promises of crypto ecosystems and bolstered the view that crypto assets are inherently unviable because they lack sovereign backing and stringent regulation.Nevertheless,it is widely expected that these events do not imply an end to crypto and that at least some o
34、f its underlying technologies will persist and evolve.4 Technology that makes financial intermediation faster,cheaper and more efficient,public blockchains that reduce the need for intermediaries,and self-executing contracts that add functionality to traditional financial services may eventually pro
35、vide effective solutions to the long-standing problems of monetary and financial systems.Given that exploiting the benefits of these 1 Encryption is a form of record keeping that can certify transactions without an intermediary.2 With crypto assets being the most general term and cryptocurrencies th
36、e most widely used form of crypto assets,these two terms are often used interchangeably.Technically speaking,crypto assets may be subdivided into(i)non-fungible tokens(NFT),which are mostly used by artists to monetize and control their work,or in play-to-earn games,and can be resold on NFT-marketpla
37、ces,and(ii)private digital currencies.The latter can be divided into cryptocurrencies,i.e.,private digital currencies that have no backing and whose value fluctuates relative to a monetary unit of account depending on supply and demand,and stablecoins,i.e.,private digital currencies whose value is p
38、egged to a fiat currency(such as the dollar)or backed by collateral.3 For a chronology of events as of mid-November 2022,see https:/ an account of the collapse of FTX,see Joshua Oliver“Sam?Are you there?!The bizarre and brutal final hours of FTX,Financial Times,8 February 2023,https:/ See,e.g.,Kenne
39、th Rogoff“Will crypto survive”,Project Syndicate,25 November 2022,https:/www.project-syndicate.org/commentary/crypto-regulation-after-ftx-debacle-by-kenneth-rogoff-2022-11;“Is this the end of crypto?”,The Economist,17 November 2022,https:/ Song Shin,“The great crypto crisis is upon us”,Financial Tim
40、es,16 December 2022,https:/ also Prasad,2021.2Crypto assets and central bank digital currenciespotential implications for developing countriestechnologies may imply a convergence between the architecture of the crypto world and that of traditional finance,it is important to consider how crypto affec
41、ts traditional monetary and financial systems.Crypto assets affect monetary and financial systems mainly in three ways(Prasad,2021;Shin,2021;Ahnert et al.,2022).The increased accessibility,speed and ease of digital payments can provide new solutions to financial inclusion and cost of financial servi
42、ces,although without also providing an alternative monetary anchor.The centrality of data in the digital economy poses new challenges concerning privacy and competition,with network effects reinforcing impacts on monetary sovereignty and architecture.Each of these three issues ease of payments and m
43、onetary anchor,privacy,and competition and monetary sovereignty has a domestic and an international dimension.Existing research on domestic implications(IMF,2021;Prasad,2021;UNCTAD,2022a)highlights the benefits from digital payments,including potentially enhanced financial inclusion and more efficie
44、nt payment systems.It also points to potential risks concerning privacy(as reflected in challenges for consumer protection)and competition issues(as expressed in cryptoization).Cryptoization involves the replacement of domestic central bank money by crypto assets,which can adversely affect financial
45、 stability,the effectiveness of monetary policy and bank-based financial intermediation,as well as government revenues from seigniorage.Related policy recommendations generally emphasize regulation.But they also point to the potential issuance of a CBDC,for central banks both to provide a public low
46、-cost alternative to crypto assets and to continue ensuring monetary and financial stability(e.g.,Brunnermeier et al.,2019;BIS,2020,2022a;UNCTAD,2022a).Existing work on the international dimension emphasizes faster,cheaper and more secure cross-border payments.This can provide benefits,such as for r
47、emittances.But it can also pose risks by magnifying cross-border transmission of economic shocks and altering capital flow dynamics with adverse implications for the effectiveness of domestic monetary policy and capital controls or,related to privacy issues,by facilitating illicit financial flows(IF
48、Fs),including money laundering and terrorist financing(e.g.,IMF,2020;Feyen et al.,2021;UNCTAD,2022b).Competition issues concern increased risks of currency substitution,i.e.,increased accessibility of cryptocurrencies,stablecoins or foreign CBDCs for domestic use could cause the replacement of a cou
49、ntrys sovereign currency(e.g.,Adrian and Mancini-Griffoli,2021),as well as implications for the role of the dollar in the international monetary system(IMS)(e.g.,Brunnermeier et al.,2019).The bulk of this existing work features general discussions of the macro-financial implications of crypto assets
50、.It pays only occasional attention to specific implications for developing countries,pointing to existing digital divides that may complicate the adoption of digital money and payments in developing countries(e.g.,Feyen et al.,2021;UNCTAD,2022a,b).However,a broader focus on these implications appear
51、s important because(i)the intensity of crypto adoption has been most pronounced in developing countries(Chainalysis,2021);(ii)their monetary and financial systems lag in many respects in terms of accessibility,affordability,and trust,and therefore may be particularly exposed to impacts from crypto a
52、ssets;(iii)they often have unstable currencies and high inflation which encourages currency substitution,including through crypto assets;and(iv)remittances are particularly important for developing countries,while cross-border payments are the“forgotten corner of the worlds financial plumbing”(CPMI,
53、2022:1)for which crypto assets,arguably,promise a solution.This Policy Review aims at supporting developing country policymakers in their thinking about crypto assets.Its main contribution is to provide an accessible,yet academically informed,discussion of the main implications of crypto assets for
54、developing countries.It asks four main questions:(i)what are the trends and drivers of crypto adoption,and which developing countries have been concerned the most;(ii)what do the economics of crypto assets imply for the ease of payments,financial inclusion,privacy,illicit financial flows,and currenc
55、y substitution,as well as the architecture of the IMS;(iii)how can regulation shape the evolution of crypto adoption and what solutions can CBDCs and fast retail payment systems(FRPS)provide;and(iv)are the monetary,financial and payments systems in developing countries ripe for embracing crypto asse
56、ts?Crypto assets and central bank digital currenciespotential implications for developing countries3Most closely related to this Policy Review are Feyen et al.(2021)and Alfonso et al.(2022).Feyen et al.(2021)explores impacts on developing economies with a focus on stablecoins.However,these authors p
57、ay only scant attention to currency substitution and the eroding effectiveness of capital controls,which arguably are among the main risks of crypto assets for developing countries.Alfonso et al.(2022)focus on the motivation of central banks in Latin America and the Caribbean to consider issuing a C
58、BDC.Their discussion of potential implications emphasizes domestic aspects,leaving cross-border issues aside.The paper also relates to discussions of more specific issues,such as dollarization(e.g.,Brooks,2021;Christiano et al.,2021;Levy-Yeyati,2021)or capital controls(Alnasaa et al.,2022;He et al.,
59、2022;Popescu,2022).Contrary to these studies,this paper emphasizes the digital dimension of dollarization and capital controls and related impacts on developing countries.The main finding is that crypto adoption has been especially rapid in developing countries,and that these countries face importan
60、t trade-offs.They encounter big challenges trying to balance potential benefits from the use of crypto assets regarding increased financial inclusion,reduced costs of remittances,and easier access to investment finance and export credit on the one hand,and risks to(i)financial stability,(ii)the effe
61、ctiveness of monetary policy and capital controls;(iii)monetary sovereignty,with associated increased exposure to currency substitution;and(iv)further vulnerability to IFFs,on the other.Regulation can address some of these challenges,and CBDCs could eventually provide effective solutions for others.
62、However,given the many technical and policy challenges associated with CBDCs,developing countries may consider improving the attractiveness of more traditional digital payment solutions,including FRPS and auxiliary digital infrastructure,to provide more rapidly available monetary and financial solut
63、ions.The Policy Review proceeds as follows.Section 2 examines statistical evidence on trends in crypto adoption.Sections 3 discusses the economics of crypto assets and examines related implications for the ease of payments,privacy,the effectiveness of capital controls,and currency substitution as ex
64、amples of where crypto assets may have larger quantitative and potentially qualitatively different impacts on developing than on developed countries.Section 4 examines regulatory issues.Section 5 discusses the motivations of central banks to consider CBDCs.Section 6 concludes and presents policy rec
65、ommendations.The Appendix provides an econometric examination of the drivers of crypto adoption and discusses developing-country examples of FRPS and CBDCs.2.Trends and drivers of crypto adoption(i)Trends in crypto adoption:some statistical evidenceCrypto adoption has grown rapidly.Between 2020 and
66、2021,it increased more than five-fold to reach a total transaction volume exceeding$15 trillion(Chainalysis,2021).As already mentioned,2022 was marked by a sizable loss in the valuation of cryptocurrencies and stablecoins and by the bankruptcy of crypto exchanges,but these events are unlikely to imp
67、ly an end to crypto.Given pseudonymity as a main characteristic of crypto assets,there is no reliable way to measure crypto stocks or flows based on country residency.Nevertheless,available data suggest that countries in sub-Saharan Africa(SSA)and South-East Asia have been at the forefront of crypto
68、 adoption(figures 14).Survey data indicate that the share of the population that either held or used cryptocurrencies in 2021 was highest in Nigeria,Thailand,the Philippines,Viet Nam,Trkiye,Argentina,and South Africa(figure 1).Inferring the residency of on-chain crypto asset flows based on blockchai
69、n analysis suggests that crypto adoption was largest in Viet Nam,India,Pakistan,Ukraine,Kenya,Nigeria,and Venezuela(figure 2).Countries in SSA figure prominently in these country-specific statistics.The large size of crypto adoption in SSA is also reflected in data by geographic region on the value
70、of crypto assets received to the extent 4Crypto assets and central bank digital currenciespotential implications for developing countriesthat these data are measured as a share of GDP(figure 3).5 While the shares of North America,Northern,Central and Western Europe,and East Asia are the largest of a
71、ll regions if measured in absolute terms,these values are among the lowest as a share of GDP.Figure 1 Ownership or use of cryptocurrencies,top twenty economies,2021,percentage shares in total populationSource:Statista(https:/ 4 December 2022.Note:Numbers based on survey data covering 56 countries wi
72、th 10004000 respondents per country replying to the question Which of these financial products and investments do you currently use/own?(multi-pick).The figures shown here reflect respondents who selected the option Cryptocurrency(e.g.,Bitcoin).Figure 2 Crypto adoption,top 40 economies,2021,Chainaly
73、sis Index ScoreSource:Chainalysis(2021).Note:The index numbers are the geometric means of countries ranking on three measures:on-chain cryptocurrency value received,weighted by purchasing power parity(PPP)per capita;on-chain retail value received,weighted by PPP per capita;peer-to-peer exchange trad
74、e volume,weighted by PPP per capita and number of internet users.5 Apart from issues of data availability,the accuracy of the data underlying figures 2 and 3 may be reduced by two factors.First,the use of technologies that mask online transfers,or by such transfers reflecting exchanges between walle
75、ts of online providers rather than increased use by retail users.Second,so-called“crypto wash trading”,i.e.,inflated volume reporting by unregulated crypto exchanges that try to improve their ranking,thereby attracting more users(Cong et al.,2022).0554045NigeriaThailandPhilippinesViet Nam
76、TrkiyeArgentinaSouth AfricaSwitzerlandKenyaMalaysiaBrazilNetherlandsColombiaCzechiaIndiaPortugalSpainChilePakistanIrelandUnited Arab EmiratesUnited StatesPeruHong Kong,ChinaGreeceRepublic of Korea00.20.40.60.81Viet NamIndiaPakistanUkraineKenyaNigeriaVenezuela(Bolivarian Republic of)United StatesTogo
77、ArgentinaColombiaThailandChinaBrazilPhilippinesSouth AfricaGhanaRussian FederationUnited Republic of TanzaniaAfghanistanUnited KingdomPeruMalaysiaMoroccoIndonesiaTrkiyeCameroonBulgariaBangladeshNepalCanadaDemocratic Republic of the CongoBelarusFranceEcuadorBeninMozambiqueAustraliaHong Kong,ChinaRepu
78、blic of KoreaCrypto assets and central bank digital currenciespotential implications for developing countries5Figure 3 Crypto asset value received,share in world total,June 2020 June 2021,and share of crypto asset value in GDP,2020,by geographic region,percentagesSource:UNCTAD calculations based on
79、Chainalysis(2021)and UNCTADstat database.Note:Composition of geographic groups as in Chainalysis(2021).Shares in GDP are estimates.Estimates for the period 20222027(figure 4)suggest particularly large absolute increases in crypto currency turnover in some advanced economies(such as the United States
80、,Japan,the United Kingdom,and Germany)and India,and large relative increases in Pakistan,Nigeria,Argentina,and Viet Nam.Figure 4 Crypto currency turnover,2022 and 2027 estimates,selected economies,$millionSource:Statista(https:/ 4 December 2022.0510152025North AmericaLatin America and CaribbeanCentr
81、al,Northern and Western EuropeEastern EuropeCentral and SouthernAsia and OceaniaEast AsiaMiddle East andNorth AfricaSub-Saharan AfricaPercentagesShare in global cryptocurrency valueShare of cryptocurrency value in GDP010 00020 00030 00040 00050 00060 00001 0002 0003 0004 0005 0006 0007 0008 0009 000
82、ArgentinaAustraliaAustriaBelgiumBrazilCanadaChileColombiaCzech RepDenmarkDom RepFinlandFranceGermanyGreeceIndiaIndonesiaIrelandItalyJapanKenyaLithuaniaMexicoMoroccoNetherlandsNew ZealandNigeriaNorwayPakistanPeruPolandPortugalRep of KoreaRussiaSaudi ArabiaSerbiaSouth AfricaSpainSwedenSwitzerlandThail
83、andTrkiyeUnited KingdomVietnamUnited StatesAll countries,excluding United States,2022(left axis)All countries,excluding United States,2027 estimates(left axis)United States,2022(right axis)United States,2027 estimate(right axis)6Crypto assets and central bank digital currenciespotential implications
84、 for developing countries(ii)Potential drivers of crypto adoptionThe rise in crypto adoption relates to various factors.According to Chainalysis(2021),the high scores in their data on crypto adoption of countries in Central and Southern Asia and Oceania mainly reflect non-fungible tokens and their u
85、se in play-to-earn(P2E)games(the two largest ones being operated in Viet Nam and Australia,and the scale of P2E-penetration being particularly large in India,the Philippines,and Viet Nam,as well as in the United Arab Emirates).6 This country group(especially India,Australia,and Viet Nam)is also a hu
86、b for innovation in blockchain-based entertainment.It is difficult to quantify some potential drivers of crypto adoption,such as an appetite for speculative investment,frustration with the lack of innovation in traditional financial intermediation,and the value attached to the perceived anonymity of
87、 transactions.7 Nevertheless,an econometric exercise(Appendix 1)indicates that the ease of using crypto assets,a younger demographic structure,and volatile macroeconomic conditions currency depreciation,exchange rate volatility,and inflation are general drivers of crypto adoption.Remittances could b
88、e another driver of crypto adoption.High hopes have sometimes been put in the use of crypto assets,and blockchain technology more generally,to boost remittances,even though any such potential is subject to risks of enhanced IFFs and data misuse(e.g.,Rhmann et al.,2020).Using crypto assets for remitt
89、ances would reduce both the cost and time of transmittances,mainly because of a reduced number of intermediaries.The size of remittances and their cost can give some indication of the potential gains and beneficiaries.According to data from the World Bank(2022),the global average cost of sending mon
90、ey exceeds 6 per cent of the amount remitted,with SSA being the most expensive region of destination,with an average cost close to 8 per cent,and South Asia the lowest cost receiving region,with an average cost of about 4 percent.With remittances sent to low-and middle-income countries in 2021 amoun
91、ting to about$605 billion8,this represents an annual transaction cost of roughly$30 billion for these countries.It also implies a sizable gap with target 10c of the Sustainable Development Goals(SDGs):“By 2030,reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate
92、remittance corridors with costs higher than 5 per cent.”Indeed,while the G20 called on the national financial services sectors to lower remittances transfer costs to below 5 per cent in 2015,progress has been slow(CPMI et al.,2021).An examination of the size of remittances and their cost might indic
93、ate which developing countries would benefit most from a reduction in the cost of remittances.South Asia received the most remittances as a share of GDP during 20162020,probably driven by the large remittances flows to Nepal which is the only country from this region among the top 20 recipient count
94、ries(table 1).Many of the other top recipient countries are small countries,including small island developing states.Small countries also are among the countries for which the cost of receiving remittances was highest during 20162021(table 2).Taken together,this evidence suggests that improving paym
95、ent systems related to remittances and achieving SDG target 10c would benefit developing countries from all geographic regions and that many small countries would be among the main beneficiaries.6 For further data on the geographic and demographic characteristics of P2E-players see,e.g.,https:/ Evid
96、ence from Auer et al.,2022,indicates a positive relationship between the price of Bitcoin and downloads and active use of crypto apps,suggesting that speculative motives play a significant role in Bitcoin use.8 See https:/unstats.un.org/sdgs/report/2022/Goal-17/.Crypto assets and central bank digita
97、l currenciespotential implications for developing countries7Table 1 Average remittances received as a share of GDP,by geographic region and top 20 countries,percentages,20162020Source:UNCTAD calculations based on World Bank,World Development Indicators database.Note:Geographic regions as defined by
98、World Bank.Table 2 Median cost of receiving remittances from the United States as a share of amount sent,top 30 developing countries,percentages,20162021Source:UNCTAD calculations based on World Bank,Remittance Prices Worldwide database.Note:Country ranking based on cost of transferring$200.Geograph
99、ic regionPercentagesCountryPercentagesCountryPercentagesWorld0.8Tonga35.6Jamaica17.6North America0.0Kyrgyz Republic30.5Lebanon16.2Europe and Central Asia0.8Tajikistan27.9West Bank and Gaza16.1Latin America and Caribbean1.8Nepal24.9Kosovo16.1Middle East and North Africa2.0Lesotho22.3Somalia14.9Sub-Sa
100、haran Africa2.6Bermuda21.2The Gambia14.2South Asia3.8El Salvador20.9Comoros14.2East Asia and Pacific0.5Honduras20.3Marshall Islands13.7Haiti19.3Guatemala12.9Samoa18.8Liberia12.8Transfer of$200Transfer of$500Transfer of$200Transfer of$500Cuba10.010.1Colombia 5.64.0Cabo Verde 8.36.6Yemen 5.52.2Guyana
101、8.36.8Egypt 5.53.3Lebanon 7.56.2China 5.42.6Thailand 7.35.5Brazil 5.33.9South Africa 7.05.6Ethiopia 5.22.8Jamaica 6.74.8Eritrea 5.02.3Afghanistan 6.63.5Haiti 5.02.4Indonesia 6.54.5Liberia 5.02.0Kenya 6.54.7Nigeria 5.03.6Ghana 6.34.8Nepal 4.73.3Jordan 6.33.6Pakistan 4.53.1Somalia 6.06.0Mexico 4.42.9C
102、osta Rica 5.74.2Vietnam 4.42.0Dominican Rep5.64.1Guatemala 4.42.78Crypto assets and central bank digital currenciespotential implications for developing countriesHowever,as indicated by the econometric analysis in appendix 1,there is no evidence of a relationship between remittances and crypto adopt
103、ion.One reason could be that reduced cost may well imply cheaper remittances,but this cost reduction might not translate into sustained higher remittance levels.Recent evidence indicates that the response of remittances to transaction costs is essentially short-term and dissipates within three month
104、s following the cost reduction(Kpodar and Imam,2022).Remittances are less responsive to transaction costs,for example,where financial systems are developed,as well as with more competition in remittances markets and higher ICT-use,access,and affordability.Another reason could be that the dependent v
105、ariable,which is based on survey data,may not be representative or does not fully capture the use of crypto currencies for remittances.Using data from two large centralized P2P-exchanges with a global reach,Graf von Luckner et al.(2023)show that an important use case of Bitcoin is as a vehicle curre
106、ncy for cross-border transfers,including remittances.9It should also be noted that specialized money transfer operators or interfaces that use smartphone applications can similar to the promises of crypto assets provide near instantaneous transfers at significantly reduced cost,and they can do this
107、while respecting financial regulation that provides consumer protection.One such example is the collaboration between the central bank of Pakistan and AliPay for remittances from Malaysia to Pakistan.10 Another example is the Unified Payment Interface(UPI),a real-time payment system developed by the
108、 National Payments Corporation of India(NPCI)and regulated by the Reserve Bank of India,which became interlinked with Singapores PayNow system in February 2023 to enable instant and low-cost fund transfers.11 This and other FRPS are further discussed below.3.The economics of crypto assetsIssuing cry
109、pto assets may be considered as an attempt to find new solutions to longstanding problems of monetary and financial systems such as providing efficient,secure and affordable monetary transfers,fostering financial inclusion,and finding the right balance between ensuring privacy and preventing IFFs.Su
110、ch solutions may affect developing countries by reshaping the architecture of monetary and payment systems,the nature of currency competition,and the set-up of the IMS.This section discusses the economics of crypto assets.The following sections focus on how developing countries may address related c
111、hallenges through regulation,CBDCs,or FRPS.(i)Crypto assets and the architecture of monetary and payment systemsThe promise of crypto assets and blockchain technology is to improve existing monetary and financial systems by increasing financial inclusion and allowing for more efficient,secure,and af
112、fordable monetary transfers while preserving privacy(e.g.,Prasad,2021).To assess the potential impacts of an increased use of such assets in payments,it is useful to compare the monetary characteristics of crypto assets with those of cash and traditional digital money.9 However,it should be noted th
113、at,from a practical point of view,a positive relationship between crypto adoption and remittances would imply that both the sender and the receiver of remittances are able to handle cryptocurrencies.Judging from the case of El Salvador discussed below,this might require educated and digitally savvy
114、individuals at each end of the transaction,as well as the existence of digital infrastructure that can support transfers through cryptocurrencies.A prevalence of all these conditions combined may be difficult to find in many developing countries.10 https:/www.pri.gov.pk/pakistan-adopts-blockchain-te
115、chnology-to-attract-remittances/11 See,e.g.,https:/ also tries to discourage the use of crypto assets through taxation https:/ assets and central bank digital currenciespotential implications for developing countries9Cash in the form of banknotes and coins is issued by central banks,i.e.,it is sover
116、eign(or public)money.Cash settles payments instantly and in an inclusive way as its use requires no access to digital money.Cash payments protect users privacy,data,and identity in financial matters by not involving a third party that verifies their identity.Cash denominated in domestic currency is
117、legal tender and the central bank guarantees its stability as a unit of account.In traditional two-layered monetary systems,digital money takes the form of bank deposits and central bank reserves.Bank deposits can always be converted to an equal quantity of cash,thanks to the combination of banking
118、supervision and regulation,deposit insurance,and the central banks function as lender of last resort(Ahnert et al.,2022).If a bank defaults on its obligations,deposit holders can claim the banks illiquid assets(Brunnermeier et al.,2019).However,using traditional digital money can be time-consuming a
119、nd expensive.Bank transfers may take days,even within jurisdictions,and the use of credit cards remains expensive for merchants.One reason for this high cost may be market concentration among card networks whose payments architecture are available across the world.12 Moreover,given that bank deposit
120、s are linked to bank accounts,privacy and inclusiveness are impaired because the identity of holders is identified and the unbanked have no access to banking services.New market entrants have used these drawbacks to gain market shares.The key innovation of cryptocurrencies and stablecoins is their u
121、se of blockchain technology that in principle can provide decentralized,direct peer-to-peer(P2P)transactions without the need for intermediaries.13 Decentralized blockchain-based validation promises secure payments,while also ensuring privacy.Moreover,eliminating banks as intermediaries promises fas
122、ter and cheaper transfers and financial inclusion of the unbanked.Given that the share of the unbanked population tends to be higher in developing than in developed countries,financial inclusion is often cited as a key advantage of digital assets for developing countries(e.g.,Prasad,2021).A reduced
123、role of intermediation may also facilitate access to finance by firms.Especially small-and medium-sized enterprises(SMEs)often find it difficult to access finance and export credit from traditional financial service providers because of information asymmetries between lenders and SME borrowers.Tradi
124、tional financial systems tend to have stringent loan underwriting and collateral requirements and,accordingly,require a vast infrastructure to maintain trust between lenders and borrowers,where the latter often lack collateral and have limited credit histories and insufficient or inaccurate data.Thi
125、s is expensive itself and frequently involves a surcharge levied by insiders.By contrast,blockchain technology could establish readily available track records and make transactions transparent and,in theory,trustworthy.Moreover,blockchain-based loans can be augmented by smart contracts,which are com
126、puter programmes that govern the transfer of digital assets and allow for greater customization and a bundling of services that address both financial and non-financial needs.14 They may also self-execute transactions as written and help to avoid loans being diverted.An associated tokenization of lo
127、ans could incentivise open-source contributions and thereby allow accessing a larger pool of lenders prepared to grant small loans.12 This has sometimes been called“the Visa-Mastercard duopoly”,see https:/ networks do not extend to China,which has a state-owned credit card network,UnionPay,and rival
128、 private digital payments networks,Alipay and WeChat,whose ambitions to expand abroad now appear modest,given current geopolitical tensions.13 In reality,however,large parts of crypto asset transaction are intermediated by crypto exchanges(e.g.,Bains et al.,2022;Weaver,2022).Interoperability between
129、 different cryptocurrencies and/or between a cryptocurrency and non-crypto parts of the financial system also require intermediaries.14 One such use could be initial coin offerings as an alternative mechanism of underwriting private investment.However,this could distort the allocation and funds for
130、productive investment(Kregel and Savona,2020).However,it should be noted that smart contracts can also cause exclusion,such as by writing them according to social or economic distinction(Morgan,2023),and that any inconsistency in the code can be used by hackers,whereby the irreversibility of blockch
131、ains causes an inability to recuperate resulting theft(Weaver,2022).10Crypto assets and central bank digital currenciespotential implications for developing countriesHowever,the superiority of on-chain financial records over the soft information gained from face-to-face contacts in relationship bank
132、ing is questionable,and they cannot make up for concerns with data quality and low SME-digitalization.The absence of a financial intermediary between the borrower and lender implies the disappearance of due diligence of commercial and investment activities,as well as of the regulation of borrowers(K
133、regel and Savona,2020).Moreover,such records obviously have no information on start-ups that have never approached lenders.On-chain lending may also be highly concentrated and permit lenders to manipulate and engage in predatory lending practices.Its application to existing crypto assets also faces
134、challenges due to the immense volatility of these assets.This can imply high credit risk and make borrowing expensive,such as by requiring collateral that exceeds the value of the loan.Moreover,linking loans to smart contracts runs the risk that even subtle programming errors can be used to siphon o
135、ff funds.Decentralized P2P crypto settings also encourage pseudonymous transactions and secrecy.Know-your-customer(KYC)and Anti-Money Laundering/Combating the Financing of Terrorism(AML/CFT)requirements,which apply to traditional digital payment methods and intermediation,may be more difficult to sa
136、tisfy in crypto-asset transactions designed to imitate cash transactions.Crypto-asset transactions that do not reveal the identity of the sender or the receiver of funds are an ideal instrument for engaging in activities such as bribery,drug trading,tax evasion and money laundering.As such,crypto as
137、sets may act as a new form of tax havens,with significant adverse implications for countries domestic resource mobilization,and therefore are very problematic from the point of view of financing for development(UNCTAD,2022c).Moreover,cryptocurrencies and stablecoins originate in the private sector a
138、nd have zero intrinsic value.And unlike traditional digital money,they are neither a liability of any institutions nor backed by any authority.The value of these crypto assets relies on the belief that users can exchange them for other goods or services.15 However,the value of cryptocurrencies has b
139、een very volatile,which makes them unattractive as a unit of account,means of payment and stable store of value.This means that they lack the essential attributes of money.Stablecoins attempt to attain the trust of public money by pegging their value to the dollar or other sovereign fiat currencies,
140、and by holding collateral meant to back outstanding liabilities.However,stablecoins remain largely unregulated,so that such transactions take place in a regulatory vacuum with no consumer protection.Moreover,raising collateral is expensive and unprofitable unless a stablecoin issuer holds collateral
141、 equal to only a fraction of the value of the coin it issues,which makes the backing highly fragile,or it holds interest-bearing assets and makes money on the interest earned.But the latter form of backing is highly vulnerable to a depreciation of these assets and can make the issuer unable to redee
142、m its stablecoin at par.This can easily lead to runs on the stablecoin,against which the issuer is not protected because it does not benefit from the regulatory requirements and protections of cash and bank deposits,or from the central bank acting as lender of last resort(e.g.,Prasad,2021).Just like
143、 cryptocurrencies,this causes stablecoins to lack the essential attributes of money and make them objects of speculation.In addition,fragmentation is an intrinsic problem of the decentralized crypto ecosystem with hundreds of different crypto assets running on incompatible blockchains.Monetary devic
144、es that run on decentralized blockchains risk being unable to realize the network effects that would allow rapid and cheap payments.Hence,decentralization comes at the cost of limited speed and scalability and makes cryptocurrencies unattractive as a means of payment for retail payment systems that
145、require a very large number of transactions per second.16 While increased usage can cause congestion and delay processing,sustaining the security of a system of decentralized consensus through self-interested validators that record 15 Public money also relies on trust.However,trust in public money i
146、s backed by government agencies and regulated financial institutions.Trust in crypto assets relies on decentralized unregulated private entities that confirm records,or on unregulated backing by collateral.16 Moreover,decentralized consensus mechanisms,especially those based on permissionless DLT an
147、d proof-of-work consensus,are inefficient in environmental terms,as they require large amounts of energy.Crypto assets and central bank digital currenciespotential implications for developing countries11transactions on the blockchain implies that these validators must be motivated by monetary reward
148、s high enough to make them prefer honest validation to potential gains from cheating.The way to reward validators is to limit the capacity of the blockchain and keep fees high.Hence,it is the underlying economic incentives,not technological constraints,that drive the fragmentation,congestion,and cos
149、t structure of the crypto universe(BIS,2022b).17Limited consumer protection has been another concern of crypto adoption.The United States Federal Trade Commission(FTC,2022)indicates that,between January 2021 and March 2022,consumers reported losing over$1 billion to fraud involving cryptocurrencies,
150、with most of these losses occurring through bogus investment opportunities that falsely promise potential investors to earn sizable returns.18 Chainalysis(2023)reports crypto-based illicit transaction volume to have risen for two consecutive years and reached an all-time high of$20 billion in 2022,u
151、p from$14 billion in 2021 and$7.8 billion in 2020.The potential of crypto assets to reduce the use of cash and the holdings of bank deposits also raises concerns regarding financial stability and the transmission of monetary policy.Reduced holdings of bank deposits would reduce bank intermediation a
152、nd hence a source of low-cost and stable income for commercial banks.This could reduce the amount or increase the cost of loans that they provide to households and enterprises,which could reduce aggregate spending.It could also encourage commercial banks to tap alternative sources of income by inves
153、ting in riskier assets,as well as households and enterprises to access loans from non-banks or equity and financial markets with the attendant increased risks compared to bank loans.The extent of substitution away from the existing banking system for deposits and payments towards crypto assets and t
154、he degree of economic and financial interconnection between the users of sovereign currency and the users of crypto assets also affect monetary policy transmission.If the substitution is large and the interconnection is weak,then the transmission mechanisms of monetary policy will become less effect
155、ive(CPMI,2015).While the very characteristics of crypto assets narrowly constrain their usability as a unit of account,medium of exchange and store of value,their use as a vehicle currency in cross-border transactions may provide an economic value.Biais et al.(2023)argue that the fundamental value o
156、f cryptocurrencies like Bitcoin lies in their expected net transactional benefits.These net benefits result from the relationship between their pseudonymity-based capacity to be used as a vehicle in cross-border transfers where government controls hinder transfers through traditional financial insti
157、tutions,relative to the costs of such transactions,with an important part of these costs concerning the sizable volatility and risk of collapse of cryptocurrency prices.The empirical analysis of Graf von Luckner et al.(2023)supports this argument,showing that the use of Bitcoin as a“crypto vehicle c
158、urrencies”for cross-border transfers,such as remittances,is largest for developing countries with sizable capital controls.The above has shown that the risks of currency substitution and IFFs may be particularly important for developing countries where macroeconomic stability are often lower,financi
159、al markets narrower and less regulated,and capital controls more prominent than in developed countries,as further discussed below.Another characteristic of crypto assets is that their usability requires effective access to digital equipment and that their benefits will not be realized if the digital
160、 divide persists.To use crypto assets,citizens need to have the capacity to connect to and use the Internet,as well as be able to access in an affordable way communication technologies that transmit data.Evidence on mobile connectivity and the use of the Internet suggests the continued existence of
161、a large digital divide(table 3).17 The recent so-called“merge”of the Ethereum blockchain,i.e.,the move from a decentralized“proof-of-work”consensus mechanism to a permissioned“proof-of-stake”mechanism where only specific network nodes can update the ledger was intended to improve the scalability and
162、 reduce the environmental footprint.While this promises significant efficiency gains and energy savings,it goes against the de-centralization principle that lies at the core of crypto assets and may give rise to market concentration and jeopardize the privacy principle.18 Similar developments have b
163、een reported for the United Kingdom https:/ assets and central bank digital currenciespotential implications for developing countriesTable 3 Digital connectivity penetration rate,selected indicators,2022,per 100 inhabitantsSource:ITU,Measuring digital development:Facts and Figures 2022,https:/www.it
164、u.int/en/ITU-D/Statistics/Pages/facts/default.aspx.(ii)Crypto assets and currency substitutionThe creation of privately issued crypto assets and their verification processes through blockchain may be seen as a solution to the technical and operational detail involved in the proposal of Hayek(1976).H
165、ayek(1976)suggested denationalizing money and replacing existing two-tiered monetary systems by a system of competing private currencies that abolishes central banks monopoly on the issuance of legal tender,which he saw as the source of recurring bouts of inflation and deflation.He believed that cur
166、rency competition would force the issuers of money to keep their currencies stable in terms of their purchasing power and that private monies would eventually drive national public monies out of business.The related loss of national monetary sovereignty the loss of supremacy of the national currency
167、 for fulfilling the three functions of money(unit of account,means of payment,store of value)is generally referred to as currency substitution.However,the incomplete fulfilment of monetary characteristics of crypto assets and limits to scaling the use of cryptocurrencies are likely to prevent their
168、evolution beyond niche status towards full-scale competitors of fiat currencies(BIS,2022b).Empirical evidence suggests that competition between cryptocurrencies and stablecoins has not resulted in the dominance of any single privately issued crypto asset(Bofinger and Mayer,2022).This suggests low ne
169、twork effects and little potential of existing crypto assets to drive fiat currencies out of business.Nevertheless,any erosion of market shares of publicly issued money due to competition from crypto assets reduces the effectiveness of monetary policy by limiting the part of monetary aggregates on w
170、hich central bank policy has a direct impact.It may also have adverse fiscal effects,in the form of declining seigniorage.Seigniorage as a source of state revenue refers to the difference between the face value of money and the cost to produce and distribute it.While the distribution of cash can be
171、very costly,particularly in vast but sparsely populated territories,printing money can be a fiscal policy instrument,for example to finance unexpected large expenditure related to emergencies,such as during the Covid-19 pandemic.However,the importance of seigniorage as state revenue strongly varies
172、across countries,depending on the elasticity of the demand for domestic sovereign money relative to nominal GDP,the ratio of base money to broader money holdings,and the perceived cost of holding domestic sovereign money relative to alternatives.Edwards(2021)reports that,during the period 19701991,s
173、eigniorage at times exceeded 20 per cent of public sector revenues in countries like Argentina,Bolivia,Brazil,and Peru.The basis for this assessment of seigniorage is the share of base money in nominal GDP.19 This share will tend to be lower in countries 19 Base money consists of bank reserves and m
174、oney in circulation.Broad money is wider and includes financial assets that can easily converted into cash.The calculation here uses broad money because comprehensive data on base money is not available.Mobile-cellular telephone subscriptionsPopulation covered by a mobile-cellular networkIndividuals
175、 using the Internet Africa 86.391.5 39.7 Americas 108.596.0 83.2 Arab States 95.596.4 70.3 Asia-Pacific 110.698.8 64.3 CIS 147.499.0 83.7 Europe 120.999.8 89.5 Crypto assets and central bank digital currenciespotential implications for developing countries13with a history of macroeconomic and financ
176、ial instability,high inflation,and recurrent currency crises,i.e.,features that tend to drive crypto adoption(appendix 1).If this share declines,for example due to the use of foreign fiat currencies or crypto assets,then the amount of collected seigniorage will decline.To illustrate the potential lo
177、ss of seigniorage revenue,figure 5 shows the evolution of the share of broad money in nominal GDP for the United States and three developing countries for which this share has been relatively high(El Salvador,India,and South Africa),as well as four developing countries with frequent macroeconomic in
178、stability,for which this share has been relatively low(Argentina,Mexico,Nigeria,and the United Republic of Tanzania).Assuming currency substitution in El Salvador,India,and South Africa to cause a decline of this share to the levels of Argentina,Mexico,Nigeria,and the United Republic of Tanzania,whi
179、le not affecting GDP,the first group of countries would lose more than half of their basis for seigniorage revenues.This is likely to be a sizable amount.At the same time,Nigeria could increase seigniorage revenues if the eNaira were to substitute for the use of foreign currencies or crypto assets.T
180、o put this illustration into perspective,it is useful to recall that central banks,particularly those in developed countries,nearly doubled base money as a share of GDP during 20072011.This has allowed total cumulative seigniorage revenues collected in advanced economies during 20082011 to reach 8 p
181、er cent of GDP,more than five times pre-2008 levels(IMF,2012).Figure 5 Broad money as a share of GDP,selected countries,19902020,percentagesSource:World Bank,World Development Indicators database.02040608099520002005201020152020ArgentinaEl SalvadorIndiaMexicoNigeriaSouth AfricaUnited Rep.
182、of TanzaniaUnited States14Crypto assets and central bank digital currenciespotential implications for developing countriesFrom an international perspective,currency substitution is often referred to as dollarization independently of whether currency substitution involves switching to the dollar or a
183、nother international currency.While dollarization has been a long-standing feature in many developing countries(Levy-Yeyati,2021),crypto assets quantitatively reinforce the incentives behind currency substitution.One reason for a change in the ratio of domestic fiat currency and crypto assets that a
184、re demanded by residents relates to the store-of-value function,i.e.,crypto assets could increase the elasticity of demand for currency substitution relative to a change in the cost of holding domestic money.This elasticity relates to the switching costs of using crypto assets as a store of value,wh
185、ereas the cost of holding domestic money is determined by expected inflation,as well as the financial infrastructure,legal frameworks and regulations that govern access to domestic deposits.If crypto assets reduce transaction costs due to the abolition of intermediaries and if they preserve their va
186、lue,for example through full dollar backing,crypto assets could strongly increase the sensitivity of demand for domestic money to a change in expected inflation of the domestic economy.A second reason why crypto assets can reinforce currency substitution is that they tend to make capital controls le
187、ss effective.Such measures typically require that financial intermediaries verify the nature of transactions and the identities of the transacting parties.Crypto assets complicate such verification because they can be held without identification of the residency of the asset holder and be traded pse
188、udonymously or on a P2P-basis without any intermediary.Even when these assets are traded and held through intermediaries,such as crypto exchanges and wallets,those intermediaries or service providers may not be regulated or obligated to comply with foreign-exchange regulations and capital controls.M
189、oreover,regulation may be inconsistent or have gaps because there is no common and consistent taxonomy of crypto assets,and because cross-border provision of crypto services makes supervision and enforcement by national authorities difficult(He et al.,2022).This loss in the effectiveness of capital
190、controls could drive more developing countries towards de-facto open capital accounts and flexible exchange-rate systems with an attendant greater exposure to spillovers from global financial markets.Even if existing measures remain effective,they may require strengthening to the extent that crypto
191、assets reduce the cost of cross-border transfers and cause an increase in gross foreign capital positions.This is because larger gross foreign capital positions imply greater valuation effects.Moreover,an increase in foreign asset positions based on crypto assets that provide no yield may increase t
192、he resource transfer from developing to developed countries,with ensuing adverse effects on developing countries current-account balances and balance-of-payments positions(Mayer,2021).While the causes of dollarization are likely to differ across countries,it may be useful to examine where dollarizat
193、ion is already high to gauge which countries may be exposed most to currency substitution through crypto assets in terms of the store-of-value function of money.Dollarization related to the store-of-value function of money may be measured by the share of foreign-currency in total deposits(IMF,2020).
194、Empirical evidence on this deposit dollarization for the period 20002017(table 4)suggests that a wide range of countries from all geographic regions have faced the risk of dollarization,but that countries in Central Asia,South-Eastern Europe,and SSA may be exposed the most.A third reason why crypto
195、assets tend to quantitatively reinforce the incentives behind currency substitution relates to network effects in the medium-of-exchange function.The greater ease and lower cost that crypto assets promise for cross-border payments imply a decline in the advantage that existing network effects confer
196、 to incumbent currencies.And while network effects may be limited for cryptocurrencies,sizable network effects could occur for global stablecoins issued by large technology companies or platforms.The fact that these platforms offer services on social networking and e-commerce platforms of global sca
197、le would facilitate a rapid scaling-up of the use of such a stablecoin with ensuing sizable network effects.Hayek(1976)did not consider the possibility that the processes of currency competition could be different between the functions of means of payment and store of value.However,such global stabl
198、ecoins can unbundle the traditional functions of money and,instead,specialize as a means of payment and bundle this monetary function with other economic functions,such as data gathering or social networking,or smart contracts.The attractiveness of crypto assets for currency substitution in the paym
199、ent system would stem from their tailored offerings of products and services or credit provision based on payment Crypto assets and central bank digital currenciespotential implications for developing countries15data(Brunnermeier et al.,2019).This attractiveness could be enhanced by the fact that su
200、ch platforms are not typically bound by exchange-rate regulations and capital controls.It is true that Libra(Diem),which might have translated these unbundling and re-bundling processes into practice,has not come to life.20 Nevertheless,policymakers in developing countries may find it worthwhile thi
201、nking about potential responses to such processes because countries lagging in digital money adoption,with weak macroeconomic fundamentals and sizable exchange-rate volatility could be drawn much faster into dollarization and international financial flow volatility than in the past.The above discuss
202、ion indicates that small,open economies with a large informal sector,a narrow financial system and macroeconomic instability are vulnerable to both traditional and digital forms of currency substitution,whereas those with an inefficient electronic payment system and strong presence of tech platforms
203、 are particularly exposed to the latter.20 Prasad(2021:168175)explains that the introduction of Libra(Diem)met stiff resistance from governments and central banks around the world for two reasons.First,Libra(Diem)was to move gradually from a centralized permissioned to a de-centralized permissionles
204、s blockchain,which could have made it a conduit for money laundering and tax-related IFFs,while making Facebook(Meta)no longer responsible for validation.Second,while Libra(Diem)was to be fully backed by assets,the enormous international network of Facebook(Meta)created a risk that its value would e
205、ventually be delinked from these assets and allow Facebook(Meta)to create money as an unregulated entity.This would have had adverse implications for monetary policy and cross-border flows.Moreover,the enormous reach and financial clout of Facebook(Meta)could have led citizens in some developing cou
206、ntries to consider Libra(Diem)more trustworthy and stable in value that their countrys fiat currency.See also,e.g.,Pistor(2021)and C Duffy,“Facebooks dream of creating its own global cryptocurrency officially comes to an end”,CNN Business,1 February 2022,https:/ PDR84.953.653.7Dem.Rep.Congo50.084.98
207、9.4Maldives45.152.453.6Nicaragua70.373.478.6Albania25.047.753.4Serbia62.778.672.2Djibouti58.446.853.4Anguillan.a.76.372.0Kazakhstan50.342.852.0Suriname46.453.171.4Uzbekistann.a.n.a.47.8Belarus70.152.769.3Kyrgyz Republic57.952.147.5Uruguay81.668.669.0Paraguay63.242.647.3Georgia78.965.767.9Ukraine38.4
208、42.646.0Haiti39.156.466.2Peru78.549.244.4Lebanon62.358.863.7Jamaica23.036.542.2Mauritius10.264.160.3Moldova48.845.641.5Croatia70.771.560.1Trkiye45.128.341.5Tajikistan67.860.657.1Seychellesn.a.25.141.4Armenia81.264.055.7North Macedonia34.953.240.9Table 4 Evolution of deposit dollarization,selected co
209、untries,20002017,percentagesSource:UNCTAD elaboration,based on Christiano et al.,2022,database,available at https:/ ordered by exposure in 2017.16Crypto assets and central bank digital currenciespotential implications for developing countriesThese unbundling and re-bundling processes may also affect
210、 the IMS.Digital platforms tend to develop closed ecosystems where users are locked in through economic incentives and technical standards(UNCTAD 2018,2019).As a result,the bundling of payments with data services in such ecosystems encourages network effects in terms of the means-of-payment function
211、 of money but discourages interoperability between payments services.Such ecosystems,which have been called“digital currency areas”(Brunnermeier et al.,2019),are held together by digital interconnectedness.They may occur within countries.21 But they may also transcend national borders and link a cur
212、rency not to a specific macroeconomic regime but to the use of a particular digital network that may relate to tight trade and payments arrangements or strong geopolitical forces.Digital currency areas could be further supported by creating alternatives to the SWIFT payment messaging system,such as
213、Chinas Cross-Border Interbank Payment System(CIPS),or by developing a cross-border payment system that uses a CBDC and does not rely on SWIFT,such as mBridge,a BIS pilot project that brings together the Peoples Bank of China,the Hong Kong Monetary Authority,the Bank of Thailand,and the Central Bank
214、of the United Arab Emirates.22 However,countries could leverage such payment systems also to reinforce payment links among themselves,while excluding others,which could fragment global liquidity and trade links.4.Regulating crypto assetsRegulation is one way of influencing the evolution and use of c
215、rypto assets.However,many crypto-asset activities and markets are not compliant with applicable regulations or have remained unregulated(FSB,2022).One reason may be the technological novelties of crypto assets.Many activities escape existing regulation because decentralization and the limited transp
216、arency of the crypto universe creates significant data gaps.Definitional issues,such as difficulties in establishing whether a stablecoin issuer is a narrow bank or a money market mutual fund,or whether Ether is a commodity or a security,also hamper effective regulation.Another reason regards the ve
217、ry characteristics of crypto assets.Their inherently borderless nature and absence of an identifiable operator imply that risks are faced directly by end users,rather than by regulated financial institutions as in traditional financial systems.Moreover,the variety of involved actors and the frequent
218、 combination of services may require the disaggregation of certain functions and activities with the resulting parts attributable to a multitude of regulators regulating banks,commodities,securities,payments,etc.with sometimes fundamentally different frameworks and objectives(Narain and Moretti,2022
219、).National authorities also face the dilemma that the borderless nature of crypto assets demands an internationally coordinated,consistent,and comprehensive regulatory framework as a benchmark.The current limited availability of such a benchmark complicates the establishment of national regulation t
220、hat would both avoid regulatory fragmentation and reflect national specificities in the use cases of crypto assets and characteristics of national financial markets.However,some international standards are being developed.The Financial Stability Board(FSB,2022)aims at providing effective guardrails
221、around crypto assets and markets to address potential sources of financial instability and minimize spillover risk.It proposes a framework for effective regulation and supervision of crypto-asset activities and markets that follows the principle of“same activity,same risk,same regulation”.Accordingl
222、y,crypto assets and intermediaries which perform an equivalent economic function to one performed by instruments and intermediaries of the traditional financial sector should be subject to equivalent regulation,regardless of how a particular crypto asset is characterized(e.g.,as a payment,security,o
223、r other instrument).The framework also aims at regulating specific stakeholders,21 It may be argued that Ant Financial/AliPay and Tencent/WeChat Pay come close to meeting this definition in China.22 For further detail,see BIS,Project mBridge:Connecting economies through CBDC,https:/www.bis.org/about
224、/bisih/topics/cbdc/mcbdc_bridge.htm.Crypto assets and central bank digital currenciespotential implications for developing countries17where regulation should provide for adequate transparency,accountability,market integrity,investor and consumer protection,and AML/CFT compliance across the crypto-as
225、set ecosystem.FSB foresees finalizing the proposed recommendations by mid-2023(FSB,2022).Current AML/CFT regulations essentially rely on identity and KYC checks at the intersection between the fiat and the crypto world.Countries may also apply a risk-based approach to identify,assess and understand
226、the money laundering and terrorist financing risks that they are exposed to.23 Countries can then implement AML/CFT measures that mitigate these risks.To guide such implementation the Financial Action Task Force(FATF),which counts a wide range of developing countries among its members,introduced the
227、 first binding AML/CFT global standards on crypto assets in 2019.However,an assessment in June 2022 revealed that most countries,including developed countries,have yet to implement these measures.For example,of 98 surveyed countries,just 11 were enforcing and supervising the FATFs travel rule that e
228、nsures crypto asset firms monitor who their customers are,and who they are doing business with.According to FATF(2022),this points to an urgent need to accelerate implementation and enforcement to mitigate criminal and terrorist misuse of crypto assets.Other recent recommendations from international
229、 standard setting bodies also aim at minimizing spillover risk but emphasize regulating specific stakeholders.Regarding the prudential treatment of banks exposure to crypto assets,the Basel Committee on Banking Supervision(BCBS,2022)divides crypto assets into two broad groups to determine minimum ri
230、sk-based capital requirements for credit and market risk.A first group is seen as meeting a set of classification conditions subject to the existing Basel capital framework,while another group(including unbacked crypto assets and stablecoins with ineffective stabilisation mechanisms)should be subjec
231、t to higher capital requirements.24Given that developed countries often set the trend in financial regulation,it is useful to examine crypto regulation in the European Union(EU)and the United States.The EU framework for Markets in Crypto Assets(MiCA)25 is intended to implement recommendations of FSB
232、(2022).MiCA emphasises consumer protection by regulating specific stakeholders.For example,it requires crypto asset service providers to give detailed information about their project and have a license from one member country to do business across the EU.It also mandates stablecoin issuers to hold s
233、ufficient liquid reserves to prevent crashes like that of Terra/Luna,and puts ceilings on stablecoin issuance and trading.Moreover,it imports rules from existing equity market regulations on market manipulation and investor protection including AML/CFT rules that require crypto transfers to include
234、data on the payer and the payee.The framework is set to apply as of 2024 and bring crypto assets and exchanges under the supervision of the European Securities and Markets Authority(ESMA)and the European Banking Authority except those that are already regulated by existing EU financial services regu
235、lations,which will remain under the existing framework.Crypto regulation in the United States may have been delayed because of a fragmented regulatory scheme,as reflected in questions on the extent to which entities headquartered elsewhere can be regulated by US regulators,whether crypto regulation
236、falls in the jurisdictions of the Securities and Exchange Commission(SEC),the Commodities Futures Trading Commission(CFTC)or banking regulators,as well as concerns that regulating crypto could be seen as giving these assets undeserved credibility despite their niche role and market turmoil in crypto
237、 so far unable to cause broader financial instability.However,following the issuance of Executive Order 14067“Ensuring Responsible Development of Digital Assets”in March 2022,the Government issued a“Comprehensive Framework for Responsible Development of Digital 23 Such risk exposure may be gleaned f
238、rom“red flag indicators”,as provided by FATF(https:/www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf).24 For discussion of recommendations issued by other international standard-setting bodies,see the annex in FSB,2022.25 See https:/data.consilium.europa.
239、eu/doc/document/ST-13198-2022-INIT/en/pdf.18Crypto assets and central bank digital currenciespotential implications for developing countriesAssets”in September 2022.26 It presents ways to make traditional digital transactions easier and eliminate the perceived need for cryptocurrencies(such as by ad
240、opting instant payment systems and creating a dollar CBDC)and crack down on fraud(such as by amending the Bank Secrecy Law and laws against unlicensed money transmitting to apply explicitly to digital asset service providers,and by mandating the Treasury to complete a financial risk assessment on de
241、centralized finance).27 In addition to issuing public warnings about the risks involved in crypto assets,developing country regulators trying to avoid regulatory arbitrage and a race to the bottom may strive for the effective implementation of global standards such as those recommended by FSB(2022),
242、BCBS(2022),and FATF(2022).Three areas would appear to be particularly important.First,ringfencing the traditional financial system from spillovers from crypto.This could be done by delineating the exposure and engagement towards crypto assets of regulated financial institutions;setting limits on exp
243、osure to different types of crypto assets and stipulating specific capital and liquidity requirements for financial institutions that engage in crypto activity;and imposing transparency on stablecoin issues and crypto exchanges,including to prevent misuse of customer funds.Such an application of exi
244、sting regulation to crypto assets may rely on two reasons.One is that episodes of loss of confidence in stablecoins and crypto exchanges as reflected by the collapse of Terra/Luna in May 2022 or the implosion of FTX in November 2022-have so far had limited impacts outside the crypto-asset ecosystem,
245、which may reflect the still low interconnection with the traditional financial system.28 While this situation could change rapidly,establishing separate structures for crypto regulation could create a faulty feeling of legal certainty in the crypto ecosystem.This could increase interconnections by e
246、ncouraging banks to engage in crypto dealing,with ensuing vulnerability to adverse valuation changes,and financial activity to migrate from traditional systems to the crypto universe.It could also reduce the volatility of cryptocurrency prices and the risk of their collapse,thereby increasing the ne
247、t transactional benefits of using cryptocurrencies as“crypto vehicle currencies”.As discussed above,this may be a major concern particularly for developing countries.The other reason is that letting the crypto ecosystem live its promises that it can provide a viable financial system through the very
248、 absence of government regulation will probably cause multiple collapses such as those in 2022,thus showing the faultiness of these promises.By contrast,departures from these promises to gain efficiency and credibility are undermining the foundational promises of cryptocurrencies.Such departures are
249、 reflected by evidence that Bitcoin is inherently inefficient and its blockchain not inter-operatable with other cryptocurrencies,so that it can handle only a small fraction of the transactions needed by an economy(BIS,2022b),or by the change in the validation process of the Ethereum blockchain that
250、 may increase efficiency,but also implies centralization and reduced room for anonymity,contrary to its foundational promise(Biancotti,2022).Moreover,the dynamics around the implosion of FTX highlighted that much of crypto activity takes place on highly centralised exchanges,and it revealed how the
251、crypto ecosystem is managed by a small number of individuals from issuers of cryptocurrencies,stablecoin companies,and crypto exchanges.Second,regulators may address specific stakeholders to protect retail users of crypto assets.This could be done by mandating issuers of crypto financial instruments
252、 to provide detailed information on their product,and set strict requirements on stablecoin backing,as well as capital adequacy rules for financial institutions holding crypto assets.Regarding fraud and theft,by contrast,it may be argued that existing criminal laws can be applied.Moreover,speculator
253、s should be let bear their risks and not be bailed out for bets on assets with no intrinsic value.26 See https:/www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-framework-for-responsible-development-of-digital-assets/.27 Decentr
254、alized finance is an emerging technology that promotes P2P transactions,including those involving crypto assets.28 See note 4 above.Crypto assets and central bank digital currenciespotential implications for developing countries19Third,and especially important for developing countries,regulators mig
255、ht need to adapt foreign-exchange regulations and capital controls to address risks of currency substitution,as discussed above.One such possibility would be the eventual adoption of a CBDC combined with a smart contract that would be programmed such as to avoid using the CBDC for the kind of cross-
256、border transfers that traditional capital controls are intended to prohibit.One case of navigating these various regulatory issues may be represented by El Salvador and the Central African Republic that have left crypto assets basically unregulated and encouraged their use with a view to swapping so
257、vereign currencies for cryptocurrencies.29 In September 2021,El Salvador made Bitcoin legal tender,along with the dollar that continued to serve as a reference currency for accounting purposes.30 The government required all economic agents to accept Bitcoin as a medium of exchange for all transactio
258、ns.It provided major adoption incentives by launching the Chivo Wallet app,which allowed users to trade bitcoin and dollars without transaction fee,giving a$30 Bitcoin bonus to citizens who downloaded the app,and providing a discount on fuel purchased with the app.The government also guaranteed the
259、automatic conversion from Bitcoin to dollars through a trust fund of$150mn,financed from the government budget.Its hope was that Bitcoin use would promote financial inclusion,attract tourists trying to spend their Bitcoins,and reduce the cost of remittances to El Salvador(IMF,2022).However,the uptak
260、e of Bitcoin,whose valuation declined by about 60 per cent within one year after the experiment started,appears to have been low.Survey data(Alvarez et al.,2022)indicate that most downloads of the app took place immediately after its launch,with the objective to receive the bonus(equivalent to 0.7 p
261、er cent of annual per capita income),and less than half of them continued using the app.It also indicates that app users were predominantly owners of a cell phone with Internet access,banked,educated,young,and male.Citizens who knew about,but did not use the app,indicated that they preferred cash an
262、d did not trust the app or Bitcoin.31 The Central Bank of El Salvador reports that only 1.7 per cent of remittances were received via digital wallets in August 2022.32 At the same time,it appears that by mid-November 2022,the country had lost about two-thirds of the$105 million spent on purchasing B
263、itcoin,33 its fiscal deficit strongly increased,and negotiations became difficult with the IMF that urged the country to abandon Bitcoin as legal tender(IMF,2022).In April 2022,the Central African Republic made Bitcoin legal tender,alongside the CFA-franc.It allowed using Bitcoin for all electronic
264、transactions and all monetary obligations denominated in the CFA-franc,with a view to improving the conditions of citizens and putting the country on the map of the worlds boldest and most visionary countries.34 In July 2022,the country launched the Sango project with a view to making the Sango Coin
265、(to be mined in Dubai)the first sovereign national digital currency,with an initial 210 million Sango Coins put up for sale at$0.10 each to raise$21 million.To help its adoption,the government intends to provide residency or citizenship in exchange for purchasing pre-defined amounts of Sango Coins t
266、hat must be deposited with the government for a specific amount of time before being freely disposable.3529 Proposals to use a digital currency as a legal payment method have been advanced in other developing countries,including Argentina,Brazil,Panama,and Paraguay(Alvarez et al.,2022).30 The dollar
267、 became legal tender since 2011 and the local currency,the coln,no longer circulates.31 Regarding Bitcoin use by businesses,the Chamber of Commerce and Industry of El Salvador indicated in March 2022 that only 14 per cent of businesses were transacting in Bitcoin and less than 4 per cent felt that B
268、itcoin use had increased their sales(https:/ See https:/www.bcr.gob.sv/2022/09/20/las-remesas-familiares-acumularon-us5065-6-millones-al-mes-de-agosto-de-2022/.33 See“El Salvadors bitcoin experiment is not paying off”,The Economist,17 November 2022,https:/ https:/ See http:/www.sango.org.20Crypto as
269、sets and central bank digital currenciespotential implications for developing countriesThese moves may be controversial in economic terms not only because the volatility of Bitcoin can undermine monetary and financial stability.In addition,only a small percentage of the population has access to elec
270、tricity or the Internet.Frequent electricity outages present operational risks where significant downtime periods can prevent the use of services and result in losses of customer funds or congestion and high transaction costs.36 Moreover,the country is a member of the Central African Economic and Mo
271、netary Community(CEMAC),whose arrangements give the Bank of Central African States the exclusive right to issue money in the monetary union.37 A mechanism that allows converting CFA-francs into cryptocurrency would also allow any CFA-franc holder in CEMAC to move currency out of the region in an unc
272、ontrolled manner.However,Bitcoin adoption may well be motivated more by political considerations,such as to maintain political stability through a private security entity that may be unable to accept payment in CFA-franc,or to loosen ties with France.The CFA-franc may well provide macroeconomic stab
273、ility and low inflation.However,perceptions that these benefits mainly accrue to local elites and that the CFA-franc link leads to overly constrained monetary policy and associated fiscal rules that were causing exchange-rate overvaluation and holding back economic development of CFA-franc countries
274、 have led countries of the West African Economic and Monetary Union(UEMOA)to loosen ties with the French Treasury,with similar steps so far not adopted by CEMAC.38The extreme opposite to welcoming crypto assets in El Salvador and CAR is the outright ban that China has instituted in September 2021.Th
275、e Chinese government declared all private crypto-related transactions illegal,citing concerns about speculative investments,extreme price volatility,gambling fraud,and money laundering(Biancotti,2022).39 In a similar vein,the Indian Government sought to introduce a revised Cryptocurrency and Regulat
276、ion of Official Digital Currency Bill in 2021,which seeks to prohibit all private cryptocurrencies in India.Bangladesh,Nepal,and a range of countries in the Middle East and North Africa have also banned cryptocurrencies(Biancotti,2022),whereas Iran passed a law in September 2022 that allows business
277、 imports to be paid for in cryptocurrencies,even as speculative investments remain illegal.Regarding countries in SSA,six(Cameroon,Ethiopia,Lesotho,Sierra Leone,Republic of Congo,and United Republic of Tanzania)have banned crypto,while two-thirds have implemented some restrictions.40 For example,Nig
278、eria prohibited the private creation and dealing in cryptocurrencies and barred them from becoming legal tender,and it launched its own digital currency(the eNaira)in 2021.41 In Latin America and the Caribbean,Argentina,Bolivia,Dominican Republic and Ecuador have fully or partly banned crypto assets
279、(Appendino et al.,2023).To summarize,regulation can address many public-policy concerns about crypto assets.However,it cannot address challenges regarding the availability of public money and its convertibility promise when 36 See David Pilling,“Central African Republics adoption of bitcoin is mostl
280、y about geopolitics”,Financial Times,26 May 2022,https:/ See Article 21 of the Convention governing the Central African Monetary Union,available at https:/www.cemac.int/sites/default/files/inline-files/Convention_umac.pdf.38 See“La France acte officiellement la fin du franc CFA en Afrique de lOuest”
281、,Le Monde,21 May 2020,https:/www.lemonde.fr/afrique/article/2020/05/21/la-france-acte-officiellement-la-fin-du-franc-cfa-en-afrique-de-l-ouest_6040339_3212.html.39 See also,e.g.,“China Makes Cryptocurrency Transactions Illegal:An Explainer”,China Briefing,21 October 2021,https:/www.china- For the st
282、ate of crypto regulation in a range of countries,see the Official Monetary and Financial Institutions Forum(OMFIF)Digital Asset Regulatory Tracker(https:/www.omfif.org/digitalassetstracker/),as well as the 2022-Thomson Reuters report“Cryptocurrency regulations by country”https:/ sub-Saharan Africa,s
283、ee Fuje et al.,2022.41 See https:/www.cbn.gov.ng/Out/2021/FPRD/eNairaCircularAndGuidelines%20FINAL.pdf.Crypto assets and central bank digital currenciespotential implications for developing countries21cash is no longer used.National regulation also faces difficulties in addressing monetary sovereign
284、ty concerns where financial instability increases the exposure to currency substitution or where a few global firms dominate domestic digital retail payments.Moreover,regulation is unlikely to improve payments efficiency and financial inclusion.Hence,policymakers may consider providing citizens and
285、firms with a public money alternative to crypto assets.Such an alternative could be a CBDC,as discussed next.5.Central Bank Digital CurrenciesThe declining use of cash and the growing role of crypto assets have led central banks to contemplate CBDCs.A CBDC is a publicly issued digital money denomina
286、ted in the national unit of account.It is issued and regulated by a countrys national authority or central bank.As such,it offers,in digital form,the unique advantages of central bank money:monetary anchor,settlement finality,liquidity and integrity.There are two main types:a retail CBDC is issued t
287、o the general public,such as individuals and businesses,and exhibits characteristics of cash(but in digital form),while a wholesale CBDC is issued primarily for interbank transactions and available only to selected financial institutions(similar to bank reserves).However,compared to bank reserves,a
288、wholesale CBDC may be accessible to a wider range of counterparties and be interoperable with other payment systems(both domestic and foreign).CBDCs may be programmable in the form of smart contracts.Most developing country central banks are investigating both retail and wholesale CBDCs(Kosse and Ma
289、ttei,2022).Central banks may have five main reasons to issue CBDCs(e.g.,Ahnert et al.,2022).First,CBDCs are backed by the full faith of the issuing countrys central bank.Hence,they maintain the monetary anchor of current financial systems,as well as the trust,safety,liquidity,and settlement finality
290、 of traditional central bank money.By issuing CBDCs,central banks can complement cash as public money,ensure the continued availability of a risk-free medium of exchange,and maintain payments efficiency,even in a world in which consumers and firms increasingly turn to electronic payments.Second,rega
291、rding cross-border use,CBDCs would not require the multi-layered correspondent banking relationships that characterize current remittances transfers,as CBDCs are direct liabilities of central banks and being the least risky and most liquid settlement assets could significantly ease settlements.By re
292、ducing the number of intermediaries,wholesale CBDCs would allow cross-border payments to become faster,cheaper,more transparent,and easier accessible.Targeted CBDC-design could facilitate interoperability,as well as help to use CBDCs for finetuning and calibrating capital controls(BIS,2022a).Third,t
293、he issuance of CBDCs would help central banks to ensure monetary sovereignty and their function as lender of last resort that safeguards financial stability because they can print unlimited amounts of the domestic currency to support financial institutions in distress.By contrast,using cryptocurrenc
294、ies and stablecoins and quoting prices in a different unit of account can give rise to financial stability risks because,for example,distress liquidity support is no longer effective if liabilities are denominated in another unit than that of public money.By offering a digital version of sovereign m
295、oney,central banks would safeguard monetary sovereignty even in situations of widely used global stablecoins or the issuance of private digital money by digital platforms with a global reach.By exploiting their customer base,global digital platforms may quickly become dominant issuers of private dig
296、ital money.They could bundle payments with their digital services,such as online marketplaces,messaging apps and financial services(for example lending and insurance)(Brunnenmeier et al.,2019).A CBDC could ensure that public money remains used in practice,and thus help ensuring monetary sovereignty.
297、Fourth,while all digital transactions leave a trail,a CBDC could help to preserve privacy at an intermediate degree between cash,which fully preserves privacy,and crypto assets.Issuers of crypto assets,and especially global platforms,typically collect personal data when people use their digital mone
298、y to make payments.CBDCs could of course lead to an undue concentration of information on payments with government authorities.However,preventing data misuse is largely a regulatory problem and,depending on their design,CBDCs could allow users to retain more control over their data,such as by lettin
299、g them determine for themselves when,how,and to what extent they want to share personal data with third 22Crypto assets and central bank digital currenciespotential implications for developing countriesparties in exchange for more personalized services.As such,CBDCs could help to set privacy standar
300、ds for digital payments.Moreover,as a public low-cost alternative to crypto assets issued by global platforms,where network effects tend to create highly concentrated payments markets,CBDCs could be used to counter oligopolistic market structures in digital money.However,appropriate regulation of pr
301、ivately issued digital money would at least partly address market concentration and allow the design of CBDCs to concentrate on other matters(Assenmacher and Bindseil,2021).Fifth and of particular importance for developing countries could be the use of CBDCs as a single platform for payments to and
302、from the Government.This could facilitate tax collection,for example,by making it more cumbersome to use cash for reasons of tax evasion.It could also enable the Government to reach every citizen everywhere and at any time.The provision of targeted transfers could concern regular payments but play a
303、 particularly important role in immediate relief payments to households and businesses in case of emergencies.Such CBDC-transfers could be programmed with an expiry date and made conditional on being spent on certain goods and services.Such payments could be disbursed more rapidly than through check
304、s or tax refunds.On the other hand,data privacy and rapid disbursement could also be achieved through FRPS,provided that all government payment beneficiaries have access to transaction account facilities.Some observers also see CBDCs as providing new and more efficient monetary policy instruments.Ac
305、cording to this argument,central banks could control either the quantity or price of CBDCs in a countercyclical fashion(Barrdear and Kumhof,2016)or more easily overcome the zero-lower bound of monetary policy by loosening constraints on applying negative interest rates to stimulate aggregate demand(
306、Ahnert et al.,2022).However,allowing these features to occur would require abandoning cash,which central banks are not envisaging(Bindseil,2020).It should also be noted that in developing countries monetary policy transmission may suffer from vulnerabilities in the financial system and the presence
307、of a large informal sector more than from an ineffectiveness of existing monetary policy instruments.These potential advantages face six main concerns.First,just like an increased use of crypto assets,user decisions to hold CBDCs instead of bank deposits could cause bank disintermediation.This could
308、 increase banks funding costs and reduce their profit margins which,in turn,could force them to raise interest rates to retain customers,which could jeopardize their money-creation function via credit provision(Cecchetti and Schoenholtz,2021).It may also encourage banks to take on riskier assets on
309、their balance sheets,such as by extending riskier loans or investing in speculative assets.Such greater risk exposure could facilitate bank runs.To counter these effects,a CBDC could be designed as a system of tiered remuneration,with CBDC holdings beyond some threshold being discouraged by a suffic
310、iently unattractive remuneration,which in cases of banking crises could be made even less attractive to prevent bank runs(Bindseil,2020).On the other hand,the mere possibility of negative interest rates could reduce the acceptability of CBDCs.Instead,tiering could work with several thresholds of hol
311、dings and increasing levels of penalty,which would be independent of the economic,monetary,and financial situation.Central banks could also deposit money at banks to compensate their loss in client deposits(Brunnermeier and Landau,2022).Second,to the extent that countries would adopt a retail CBDC,t
312、hey may risk largely giving up the existing two-layered monetary system,based on the co-existence of central bank and commercial bank money.It could also imply for the central bank to assume sizable additional logistical tasks.This may be challenging for many developing countries that may lack the r
313、equired human and financial resources.It might also duplicate solutions that have been,or can be,developed by the private sector,introducing inefficiencies.Taking direct responsibility for a larger payment system would also risk problems in terms of disservices and malfunctions to be attributed to t
314、he central bank,which could cause reputational damage and hamper achieving the institutions primary objectives.Moreover,introducing a CBDC might require a revised legal framework.Crypto assets and central bank digital currenciespotential implications for developing countries23Third,to the extent tha
315、t a CBDC can be held by non-residents,increased ease and efficiency of cross-border payments could create new international arbitrage conditions between domestic and foreign interest rates and the exchange rate.It could undermine national control of monetary policy and facilitate circumvention of ca
316、pital controls with ensuing increased capital-flow and exchange-rate volatility.As a result,economies with high inflation and volatile exchange rates might experience an increase in currency substitution(Levy-Yeyati,2022).To curb currency substitution,CBDCs could be designed by issuing central banks
317、 such as to preclude or limit their use outside the issuing country.CBDC-issuing central banks could also allow foreign countries to introduce such limits on their own territory,or wallets in recipient countries could be designed to allow local authorities to implement certain exchange restrictions
318、or capital controls.In addition,the programmability of CBDCs could potentially be used to allow only small-value transfers,such as those usually used for remittances.On the other hand,designing CBDCs such that their use is restricted to citizens of prescribed economies could cause fragmentation of t
319、he international monetary and financial system.Like digital currency areas based on stablecoins issued by global tech platforms,digital currency areas could also occur around CBDCs from issuers of international currencies the United States,the euro area42 and,potentially,China to the extent that tho
320、se CBDCs would be available to non-residents.A decline in the cost of cross-border payments related to issuing such a CBDC may enhance its role as a global means of payment,boosted by its safety,liquidity,efficiency,and scalability.These processes could enhance existing network effects and make the
321、dollar become even more dominant.On the other hand,a digital Euro or the e-CNY could scale up faster if they offer significant advantages in terms of costs,trust,and ease of use.This could be achieved by combining such CBDCs with currency swap lines,so that foreign-exchange dealers could intermediat
322、e currency flows between local payments systems without referencing the dollar.First-mover advantages may also play a role.An edge on setting the standards and creating the infrastructure for CBDCs would not only lead in international principles for digital asset transactions but could,more generall
323、y,influence global norms and rules around the Internet,data transfer and security,and the overall digital economy.An important role in this regard could be played by mBridge,which allows participating central banks to issue their respective CBDC,as well as participating commercial banks to receive a
324、 CBDC in return for reserves and to transact directly with each other regardless of jurisdiction.The projects use case is particularly strong for international trade settlement and could accelerate an increase in the share of trade denominated in renminbi.This could eventually spur broader internati
325、onalization of the renminbi,and an associated decline in the international status of the dollar,even without China moving towards full capital-account convertibility(Eichengreen et al.,2022).In addition to altering the structure of the international monetary and financial system,cross-border use of
326、CBDCs,or their unlimited availability to non-residents,could also generate stronger international financial spillovers,thus increasing exchange-rate volatility and affecting capital flow dynamics.This is because a CBDC that can be held by non-residents and that combines characteristics such as scala
327、bility,liquidity,safety,and(potentially)remuneration creates new international arbitrage conditions that link together interest rates,the exchange rate,and the remuneration of the CBDC(Ferrari et al.,2022).The magnitude of these effects crucially depends on CBDC design,especially the restrictions on
328、 transactions by non-residents and the remuneration rate on the CBDC.These aspects underline the importance of close collaboration on standards,underlying technologies and regulation between central banks that issue a CBDC and other central banks and relevant authorities to realize the potential ben
329、efits of CBDC while guarding against the risks of currency substitution and international financial instability.42 The Federal Reserve has not decided whether to pursue or implement a CBDC(https:/www.federalreserve.gov/central-bank-digital-currency.htm,accessed on 20 December 2022).The Governing Cou
330、ncil of the ECB has launched an investigation phase on the possible issuance of a digital euro,due to end in September 2023(https:/www.ecb.europa.eu/paym/intro/news/html/ecb.mipnews221216.en.html).24Crypto assets and central bank digital currenciespotential implications for developing countriesFourt
331、h,cybersecurity and privacy risks loom large in concerns whether CBDCs should be developed at all.A larger extent of digital transactions that depend on computer software widens the vulnerability to cyberattacks.However,up-to-date assessments of cybersecurity risks will help supervision and oversigh
332、t,and internationally harmonized reporting of cyberattacks will promote rapid responses and recovery of stolen assets.Concerning privacy,a CBDC may not preserve the same level of privacy as cash,given that any transaction leaves some digital trace.Underlying ledger technology could cause a centraliz
333、ed government-administered accumulation of sensitive payment and user data that users might wish to keep private and secure,such as purchases of medicine or travel itineraries.Using ledger technologies also makes it more difficult to reverse fraudulent or erroneous transactions,including automated transactions related to programming errors in smart contracts(Weaver,2022).However,choosing specific