The future monetary system
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
Every day, people around the world make more than 2 billion digital payments.1 They
pay for goods and services, borrow and save and engage in a multitude of financial transactions.
Every time they do so, they rely on the monetary system – the set of institutions and
arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank issues
money and maintains its core functions, trust in the monetary system is ultimately grounded in
trust in the central bank. However, the central bank does not operate in isolation. Commercial
banks and other private payment service providers (PSPs) execute the vast majority of payments
and offer customer-facing services. This division of roles promotes competition and gives full
play to the ingenuity and creativity of the private sector in serving customers. Indeed, private
sector innovation benefits society precisely because it is built on the strong foundations of the
central bank.
The monetary system with the central bank at its centre has served society well. Yet
digital innovation is expanding the frontier of technological possibilities, placing new demands
on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical departure.
The crypto universe builds on the premise of decentralisation. Rather than relying on central
bank money and trusted intermediaries, crypto envisages checks and balances provided by a
multitude of anonymous validators so as to keep the system self-sustaining and free from the
influence of powerful entities or groups. Decentralised finance, or "DeFi", seeks to replicate
conventional financial services within the crypto universe. These services are enabled by
innovations such as programmability and composability (see glossary) on permissionless
blockchains. Such systems are "always on", allowing for global transactions 24/7, based on
open-source code and knowing no borders.
However, recent events have revealed a vast gulf between the crypto vision and its
reality. The implosion of the TerraUSD stablecoin and the collapse of its twin coin Luna have
underscored the weakness of a system that is sustained by selling coins for speculation. In
addition, it is now becoming clear that crypto and DeFi have deeper structural limitations that
prevent them from achieving the levels of efficiency, stability or integrity required for an
adequate monetary system. In particular, the crypto universe lacks a nominal anchor, which it
tries to import, imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their congestion and
exorbitant fees. Activity in this parallel system is, instead, sustained by the influx of speculative
coin holders. Finally, there are serious concerns about the role of unregulated intermediaries in
the system. As they are deep-seated, these structural shortcomings are unlikely to be amenable to
technical fixes alone. This is because they reflect the inherent limitations of a decentralised
system built on permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on central bank
public goods. This will ensure that innovative private sector services are securely rooted in the
trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs) and retail
fast payment systems (FPS) are well placed to serve the public interest through greater
convenience and lower costs, while maintaining the system's integrity. Decentralisation and
permissioned distributed ledger technology (DLT) can also play a constructive role, eg when
central banks work together in multi-CBDC arrangements. These innovative payment rails are
fully compatible with programmability, composability and tokenisation to support faster, safer
and cheaper payments and settlement, both within and across borders. In this way, the future
monetary system will be adaptable, allowing private sector innovation to flourish while avoiding
the drawbacks of crypto. Such initiatives could open up a new chapter in the global monetary
system.
This chapter is organised as follows. To set the stage, it first describes today's monetary
system and the high-level objectives it needs to achieve, and to what extent changes in
technology and the economic environment have opened up room for improvement. The next
section discusses the promise and pitfalls of crypto and DeFi innovations. The chapter then
discusses a vision for the future monetary system, built on central bank public goods. The final
section concludes.
What do we want from a monetary system?
To ensure the safety and stability of the system, money needs to fulfil three functions: as
a store of value, a unit of account and a medium of exchange. Where the monetary system relies
on key nodes or entities (whether public or private), they need to be accountable, through
specific mandates for public authorities and through proper regulation and supervision for private
entities. The monetary system should be efficient, enabling reliable, fast payments to support
economic transactions both at scale and also at low cost. Access to basic payments services at
affordable prices, in particular transaction accounts, should be universal to spread the benefits of
economic activity, promoting financial inclusion. Not least, the system must protect privacy as a
fundamental right, and provide user control over financial data. The integrity of the system
must be protected, by guarding against illicit activity such as money laundering, financing of
terrorism and fraud.
The monetary system is not just a snapshot of the economy as it exists today; it needs to
evolve with structural changes in the economy and society. For this reason, the means of
reaching the high-level goals set out in Table 1 should evolve with the monetary system itself
and the technology underpinning it. In short, the monetary system must be adaptable: it should
anticipate future developments and user needs. It must be attuned to technological developments
and respond to the changing demands of households and businesses, and it must foster
competition and innovation. To better serve an increasingly interconnected world, the monetary
system also needs to be open, interoperable and flexible, both domestically and across borders.
Just as economic transactions transcend borders, the monetary system will need to serve a
seamless web of interconnected entities, rather than sparsely connected islands of activity.
Today's monetary system has come some way towards these high-level goals, but there is
still some way to go. Changes in users' needs and the concomitant shifts in technology have
pointed to areas for improvement (Table 1 , second column). Current payment services can
sometimes be cumbersome and costly to use, in part reflecting a lack of competition. Cross-
border payments are particularly expensive, opaque and slow: they usually involve one or more
correspondent banks to settle a transaction, using ledgers built on different technologies.3 In
addition, a large share of adults, especially in emerging market and developing economies, still
have no access to digital payment options. But a globalised world that features an ever-growing
digital economy requires a monetary system that allows everyone to make financial transactions
domestically and globally in a safe, sound and efficient way. Catering to these changes in the
demands that society places in the monetary system calls for advances in technology and
institutional arrangements.
