[The Editors' Verdict] CBDC, Another Game Changer

Two summers ago, economists at Princeton University published a paper titled "The Digitalization of Money." The main point was that in the era of the digital technology revolution, various forms of digital currencies?some possessing only certain functions of money or combined with other services?have become game changers in the traditional monetary system.

Principles of economics textbooks explain that money performs three functions: store of value, medium of exchange, and unit of account. Considering Metcalfe's law, when the number of users on a digital network with rapid transactions exceeds a certain level, information accessibility also increases. In such an environment, specialized digital currencies focusing on one function, like stablecoins used in cryptocurrency transactions, compete and coexist. Despite controversies over bubbles, this explains why there are more than 10,000 cryptocurrencies.

During the global financial crisis, when AAA securities with private labels became almost worthless, a strong belief arose that "only states with taxing authority can produce safe assets." However, looking back now, it is unlikely that everyone would agree that the currencies of emerging low-income countries are safer than supranational cryptocurrencies.

Another type of money, digital currency based on digital platforms, initially received little attention. This was because it was created to serve the business model of a specific platform, and its use was considered very limited. However, e-commerce and social networking services (SNS) such as Amazon, Alibaba, and Facebook provide various services to numerous users on their platforms. Platform-based digital currencies combine with the services offered by the platform to build a separate ecosystem in themselves.

More than 90% of residents in major Chinese cities use payment services from third-party mobile payment companies Alipay and WeChat Pay as their basic payment methods, with the scale reaching $41 trillion annually. If digital currencies that connect different platforms emerge, a new form of global economic zone could arise in the digital space.

Less than two years have passed since the paper was published, but many events have occurred. As countries around the world flooded the market with pandemic money, cryptocurrencies broke through ceilings, and concerns about side effects are growing. Countries like China, which banned cryptocurrency trading and mining, are increasing in number.

The People's Bank of China (PBC) took measures to transfer unpaid funds held by third-party mobile payment companies to the PBC, similar to how banks deposit reserves, designating these tech companies as systemically important data intermediaries. This year, the Chinese government regulated Ant Group, the parent company of Alipay, restricting fintech services on its payment platform.

Central Bank Digital Currency (CBDC) is a response to the rapidly growing private digital currencies. However, the repercussions seem likely to spread elsewhere. Cash, which we call money, is not digital currency, and demand deposits, which are bank liabilities, have lower credit than central bank liabilities. Since reserves are inaccessible to the general public, they are all inferior to CBDC. Because of the emergence of CBDC, existing money will inevitably disappear someday. It is unknown what ripple effects the soon-to-be-released CBDC will have on banks, the core of finance, whether digital dollarization will occur in countries with fragile macroeconomic conditions, or conversely, whether the status of the dollar as the key currency will be shaken. What is certain is that CBDC is another game changer.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University