The Rise of Digital Money

Payments systems around the world are evolving with the emergence of digital money issued by private firms and central banks. We provide a conceptual framework to compare and contrast traditional forms of money with their new digital equivalents. We suggest that some forms of digital money, while less stable as a store of value, could be rapidly adopted given their advantages as a means of payment. We review the benefits and risks that would emerge. One approach to managing risks would be to require full backing of selected digital money with central bank reserves. We call the arrangement synthetic central bank digital currency (sCBDC), a private-public partnership that combines the advantages of private sector innovation and customer orientation with the safety and stability of central bank–backed money. We offer policy considerations, directions for research, and an overview of the literature to date. The analysis of digital currencies is an exciting new field crossing into monetary and financial economics that will reshape the monetary and financial systems for many years to come. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.