Digital Fiat Currencies: Economic Impact and Regulatory Requirements

Dr. Bejoy Das Gupta, Chief Economist, eCurrency


Left: Bejoy Das Gupta, Chief Economists, eCurrency; Right: Wimboh Santoso, Chairman, OJK, Indonesia

The digital revolution has profound implications for central banks. A growing number of central banks around the world are seriously considering issuing digital fiat currencies (DFCs) to maximize gains, remain relevant in a digital world, and respond to the cryptocurrency challenge. The discussions at the ITU Workshop on Standardizing Digital Fiat Currency and its Applications focused on these questions, including drawing on realtime applications and considering historical perspectives. The deliberations included presentations and case studies by central banks from China, Sweden, Norway, Egypt, Brazil and Philippines, along with roundtables and thematic panels.

I was honored to have moderated the Economic Impact and Regulatory Requirements panel. The panel brought together diverse voices, including Mr. Wimboh Santoso, Chairman of the Indonesian FSA, Professor Angela Walch of St. Mary’s University

School of Law, and Mr. Ahmed Said, Head of Economic Affairs of NTRA Egypt, who focused on implications for Indonesia, the US and Egypt, respectively. Speaking from differing areas of expertise, each highlighted benefits of a DFC instrument and raised key questions for discussion and debate. The participants emphasized that central banks needed to consider account design and technology considerations, implementation costs, and monetary policy and financial stability implications.

On the regulatory side, privacy concerns were important as was consumer protection.

Moreover, the regulations governing mobile money may need to change in a DFC world.

The group agreed on the basic premise: currently, cash is the only state-backed, easy-touse and anonymous payments system, but expensive to produce and use. It carries theft/loss risks and requires physical presence for transactions.

The panel briefly touched on the rapidly changing global financial landscape. In recent years, mobile providers around the world have offered inexpensive and readily available digital payment services. Cryptocurrencies have also emerged, promising to offer an alternative to state-backed money. Each solution along with real, perceived, and purported benefits, carry risks as well. Mobile operators essentially provide private money, which carries credit, technology and stability risks. Cryptocurrencies bring financial stability and investor and consumer protection concerns, and are prompting stepped-up regulatory oversight.

At eCurrency, we have seen a flurry of interest in DFC, a solution we’ve been forging for seven years, partly in response to the concerns and partly to help capture the benefits of the digital revolution. During the discussions, it was apparent that these factors were prompting more and more central banks to seriously consider issuing a DFC. As per the defining characteristics drawn up by many central banks, DFC is legal tender and is electronic and fully convertible one-for-one into sovereign-backed notes. It is universal, available 24/7, and usable across all payment networks. DFC provides instant and final settlement, is included in base money, and has cash-like properties.


During the deliberations, the panel as well as many of the central bank presentations saw numerous benefits to replacing a portion of a country’s cash with a digital fiat currency. First, it would provide a credit risk-free payments system, backed by the state. It would avoid concentration and technology risk associated with privately-operated systems. It would help maintain control over money supply. It would ensure that central banks remain relevant, where cash use has dramatically declined, and continue to earn seigniorage income.

Second, there could be large efficiency gains due to sharply reduced physical currency printing and distributing expenses, as well as other transaction costs. The total annual societal cost of cash could be 1-2% of GDP[1], or 3-5% of the value of a transaction, as per analysis carried out by eCurrency, and which was in line with the views of some participants. DFCs would drive down costs to a fraction of that.

Other benefits mentioned derive from expanded reach and commerce. DFCs are not limited by the denomination structure of physical banknotes and, unlike cash, can be used for long-distance transactions, thereby helping small businesses and individuals. Financial inclusion can also be lifted in developing countries. Cross-border transaction costs could drop significantly, if DFC and SDR-linked payment solutions emerge.

With an opportunity to showcase our technology and research in New York, we at eCurrency feel even more assured that an appropriate design of DFCs could help overcome apprehensions. The Workshop encouraged deep discussion about detailed approaches to implementing DFC within national payment systems and currency regimes. Many of our own conclusions were reflected in the work of others we heard. For example, we heard an active discussion about token vs. account-based DFC architectures: DFCs can be designed as a token-based system, where storage and processing are decentralized in a payments instrument, or, as an accounts-based system, where storage and transactions processing are centralized with the central bank. The token-based model most closely resembles cash, where the DFC is distributed across payments systems.


Some presenters observed that the accounts-based approach, where the central bank offers digital accounts to retail consumers, runs the risk of being a competitor to commercial banks and could contribute to financial instability during flights to safety. They felt that interest-bearing DFC accounts could raise funding costs for banks, contribute to volatility, with outcomes dependent on regulation, deposit insurance and perceptions.


In this regard, most felt that a token-based DFC system was the preferred option, where monetary policy transmission and financial stability consequences should be limited, with controlled anonymity for small transactions. Several mentioned the importance of maintaining a two-tiered economic system, with key roles for central banks and commercial banks, which a token-based approach would help preserve. Some observed that pro-DFC arguments and design issues needed further debate and analysis.


There was also a discussion on whether fintech could replace banks in credit extension, reducing central bank-dependency on them, and whether accounts-based DFCs could allow central banks to issue helicopter money to stimulate the economy during recessionary times. Some felt that these views were more academic in nature, and, in any case, more analysis was needed.


eCurrency colleagues are active participants in the ITU FG DFC and contributors to the Working Group on Regulatory Requirements & Economic Impacts, having formally contributed our research into the Macroeconomic Effects of DFC (link to paper) and its case for Financial Inclusion (link to paper) – a growing concern for central banks. We are pleased to join an ecosystem which is considering practical implications and benefits of a DFC system.


The ITU Focus Group economic impact and regulatory requirements workstream will concentrate on deliverables to be presented in draft reports for comments between the fall of 2018 and spring of 2019. These include collecting documentation that provides a reference foundation for the governance aspects of DFC; report on best practices and guideline on policy and processes to ensure sovereign security, transparency and verifiability of critical technology components; possible economic benefits and impacts of DFC on mobile payment ecosystems; and governance taxonomy models.

[1] MasterCard’s Cashless Journey report, 2013; eCurrency analysis

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