Monetary Policy in the Digital Age

The potential of digital money to replace state-issued fiat money as the predominant means of payment for retail goods combined with its ability to flow freely across international borders is increasingly attracting attention among central bankers, the media, and scholars. The concern is that central banks could lose control over the monetary aggregates regulating the money supply for conducting monetary policy. This chapter examines important regulatory challenges that arise from the increasing use of virtual currency systems. Stable monetary regimes are expected to provide a level of resilience against three types of monetary stability risks: (i) structural ‘deflation’; (ii) lacking flexibility to respond to temporary shocks to money demand; and (iii) failing to fulfil the traditional key function of lender of last resort. It is against these three types of risks that the sustainability of virtual currency systems can be assessed. The chapter concludes that, as they attract increasing attention and account for increasing volumes of financial flows, virtual currency schemes may ultimately have to become subject to increasingly tight regulation on a global level.