Eswar Prasad considers the economic, financial, and societal implications of digital currencies and payment systems

Advances in technologies that could affect banking, finance, and even the organisation of society have brought money to the cusp of a revolution. The era of physical currency is ending, and that of digital currencies has begun. Once valued as the most definitive form of money, cash seems to be on its way out even in low- and middle-income countries. At the same time, a new round of competition between official and private currencies is heating up.

The shift away from cash is both a consequence and a manifestation of other big changes. Digital technology has been a boon to efforts to broaden financial inclusion, and to do so rapidly. Simple mobile phones have become portals for basic banking products and services, enabling digital payments and connecting households of all income levels to the financial system. In middle-income countries such as China, Brazil, and India, as well as poorer countries such as Kenya and Somalia, digital payments are becoming the norm, displacing physical currency. They are a godsend to consumers and businesses, who can avoid the risks associated with handling cash – including damage, loss, and theft.

More is at stake than the convenience and efficiency of payments. The same technologies that broaden access to basic financial services could foster other useful innovations, improving lives and economic fortunes around the world. Such changes could democratise finance, benefiting poorer households by offering a greater range of saving, credit, and insurance products.

The rise of Bitcoin and other cryptocurrencies that do not rely on central-bank money or trusted intermediaries (such as commercial banks or credit-card companies) to conduct transactions seemed likely to revolutionise payments further. But these assets’ volatile prices, along with various technical constraints that limit transaction volumes and processing times, have rendered them ineffective as mediums of exchange. Instead, so-called stablecoins, which ironically stabilise their value through stores of central-bank money and government securities, have gotten more traction as a means of payment.

Still, central banks have grown concerned about the implications for financial and macroeconomic stability if decentralised payment systems or private stablecoins displace both cash and traditional payment channels managed by regulated financial institutions. A payment infrastructure that is entirely in private hands might be efficient and cheap, but some parts of it could freeze up if confidence is lost during a period of financial turmoil. And without a functioning payment system, the modern economy would come to a grinding halt.

Faced with the declining relevance of official fiat currency in retail payments, central banks around the world are contemplating issuing digital forms of central-bank money that could be used for such payments. The motives for issuing retail “central bank digital currencies” (CBDCs) range from broadening financial inclusion to increasing the efficiency and stability of payment systems by creating a public payment option as a backstop (the role now played by cash).

Accordingly, the basic functions of central bank-issued money are poised to change. Fiat money issued by national central banks currently serves as a unit of account, a medium of exchange, and a store of value – all at the same time. But the advent of various forms of digital currency, and the technology behind them, has made it possible to parcel out these functions, creating direct competition for fiat currencies in some domains.

Thus, one looming change is the separation of the various functions of money. Central-bank currencies will retain their importance as stores of value and, for countries that issue them in digital form, as a medium of exchange. But privately intermediated payment systems are likely to gain in importance, intensifying competition between various forms of private money and central-bank money in their roles as mediums of exchange.

These changes imply that the epoch of dominance by official currencies is ending, and a return to competing currencies has begun. As recently as a century ago, private currencies competed with each other and with government-issued money. Not until the emergence of central banks did the balance shift decisively in favor of fiat currency, and now the pendulum is swinging back, though only partly. Cryptocurrencies and the technological advances they represent will make payment systems more efficient, but decentralided cryptocurrencies and even stablecoins are unlikely to serve as viable independent stores of value.

For example, the value underpinning Bitcoin’s price is simply a function of scarcity (the algorithm that creates it imposes an unchangeable cap on the total number that can ever be issued). This has rendered Bitcoin a purely speculative financial asset, since it has no intrinsic value and, without a trusted institution behind it, no anchor for its price.

We also could see big changes to society itself. The displacement of cash by digital payment systems will eliminate any vestige of privacy in commercial transactions. Bitcoin and other cryptocurrencies were intended to secure anonymity and eliminate reliance on governments and major financial institutions in the conduct of commerce, but they, ironically, are spurring changes that could further compromise privacy.

After all, the shift toward regulated, centralised cryptocurrencies and CBDCs may increase government oversight of households and businesses. They may give big corporations and governments a better view into our financial lives, and greater influence over how we spend our money. A technology that was originally championed by privacy advocates might make money more efficient in some of its functions, but at the cost of destroying whatever vestiges of privacy are left in modern financial markets and commercial exchange.

Eswar Prasad is a professor at Cornell University and senior fellow at the Brookings Institution. Copyright: Project Syndicate, 2026, published here with permission.