As private digital currencies emerge, how can nations navigate the digitization of payments to maintain currency dominance and foster global economic cooperation?
As technology advances, our economic world has become increasingly digital, with global electronic payments totaling hundreds of trillions of U.S. dollars. For a long time, traditional systems led by banks and governments, like automated clearing house (ACH) transfers, SWIFT for international payments, and credit cards, dominated this landscape. However, non-bank companies such as PayPal and M-Pesa, along with firms like Apple and Alibaba, have gained substantial ground by offering faster and more flexible services.
Digitization has brought back an old idea from Austrian economist Friedrich A. Hayek: private companies should issue currencies. Cryptocurrencies, stablecoins (cryptocurrencies pegged to the exchange rate of an existing currency, like the U.S. dollar, to maintain a stable value), and decentralized finance platforms have begun to challenge traditional money systems. Facebook’s proposed digital currency, Libra, faced strong opposition from regulators before the project ended. Today, stablecoins are central to policy discussions, with the U.S. administration advocating for crypto. Meanwhile, other countries are digitizing their payment systems by improving existing infrastructure, like Brazil’s Pix or India’s UPI, or developing central bank digital currencies (CBDC), such as the digital Euro and China’s e-CNY. In contrast, the United States has formally stepped back from pursuing a CBDC.
How should countries respond to the growing challenge from private digital money, such as digital currencies, stablecoins, or non-bank payment services like PayPal? Should countries directly compete with private digital money by launching their own CBDC, or should they cooperate?
Cooperation could involve making traditional and new payment systems work better together, or even supporting the development and issuance of private digital money. Strategic and geopolitical considerations, competition among national currencies and between national currencies and private digital money, and trends like the increasing use of U.S. dollar-backed stablecoins are collectively shaping the future of money and payments. When individual countries act independently, the outcomes are often inefficient. This suggests that international collaboration could improve overall economic welfare and outcomes in currency digitization.
Countries with widely used but less dominant currencies, like China, benefit most from digitizing their currency and tend to do so earlier, gaining a first-mover advantage. In contrast, countries with dominant currencies like the United States gain a second-mover advantage. They delay their digitization efforts until their currency’s dominance faces a serious challenge, either from the rise of private digital money or from other national currencies becoming digital. Overall, their analysis reveals a clear pattern in currency and payment digitization: less dominant currencies digitize early; dominant currencies wait until they feel pressure; and the weakest currencies forgo digitization altogether.
These findings explain why less dominant currencies, like the Euro and the Yuan, are among the first to become digital through CBDCs, while the United States has not actively pursued a CBDC. Regulation often goes together with efforts to digitize national currencies: countries that most actively regulate private digital money are also more likely to pursue digitization initiatives for their currency.
Dollar-backed stablecoins can strengthen the U.S. dollar’s role in digital payments and reinforce its broader global dominance. This reduces the need for government-led efforts to digitize the currency or develop a CBDC. This perspective suggests that the United States might benefit from adopting policies that are friendly to crypto to support stablecoin growth, while slowing its digitization efforts. A fully digitized U.S. dollar could end up displacing stablecoins. More broadly, stablecoins effectively create a digital version of the dollar, substituting for a government-led digitization initiative and reinforcing dollar dominance.
Based on a new article I co-authored with Lin Cong in the Journal of Financial Economics.
Cong, L. W., & Mayer, S. (2025). Strategic digitization in currency and payment competition. Journal of Financial Economics, 168, 104055. https://doi.org/10.1016/j.jfineco.2025.104055
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