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Digital Finance Without Cryptocurrencies

Digital payments and financial transactions hold the promise of greater convenience, stronger competition, and increased savings to society. But when it comes to digital currencies, central banks – and not free-floating cryptocurrencies or stablecoins – should lead the way.

NEW YORK – When Tesla CEO Elon Musk promoted the Dogecoin and Bitcoin cryptocurrencies, their prices shot up. While some countries are taking a wait-and-see attitude toward private digital money, El Salvador has embraced Bitcoin as an official currency. And the New York State Department of Financial Services (NYDFS) has been busy issuing licenses (and collecting fees) to people who want to create and trade cryptocurrencies. Taking the opposite tack, China has recently banned both the mining of cryptocurrencies and their use as a medium of exchange.

Given the diverse policy responses, how should we assess the social costs and benefits of different types of digital currency? Let us consider free-floating cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs).

The prices of free-floating cryptocurrencies – of which Bitcoin is the most famous example – are not anchored to any other asset. Despite their rapid growth, it is important to remember that cryptocurrencies have no intrinsic fundamental value and are therefore vulnerable to price crashes.

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