Monetary Sovereignty in the Digital Currency Era

Abstract

The topic of ‘monetary sovereignty’ has been brought up in discussions surrounding the launch of global stablecoins. Although not often defined in public statements, monetary sovereignty refers to an economy's ability to set monetary policy and control the value of its currency based on its economic fundamentals. This concept is clarified by distinguishing between money and payment, legal (fiat) currency, legal tender, forced tender, and money backing. It highlights the gap between legal principles and public perception and reflects public policies towards the financial system. The role of government in preserving monetary sovereignty is then explained, as well as the potential risks digital assets acting as money may pose and how policy can alleviate these risks. While digitalisation has not fundamentally changed the nature of money, it is unlikely that global stablecoins will jeopardise monetary sovereignty in developed economies, and retail central bank digital currency issuance is not essential for its preservation. However, political economy reasons suggest that central bank digital currency will probably be launched in most economies, including developing and emerging ones.