The International Hierarchy of Money in Cross-Border Payment Systems: Developing Countries’ Regulation for Central Bank Digital Currencies and Facebook’s Stablecoin

Abstract Rich countries’ central bank digital currencies (CBDCs) and Facebook’s stablecoin constitute risks to developing countries. Foreign CBDCs risk facilitation of capital flight. Novi, Facebook’s wallet for WhatsApp risks countries’ domestic payment systems moving offshore. This article presents the analytical framework for assessing these risks by analyzing payment system dynamics in the framework of the theory of the monetary circuit applied to the international hierarchy of money. It quantifies the US and dollarized Ecuador’s pyramid of liabilities to demonstrate the impact of payment systems on the potential of banks’ money creation. While a domestic CBDC or a potent bank-money payment system can help to increase significantly the potential of money creation in a dollarized economy, the offshoring of domestic payment systems by substituting local currencies with foreign stablecoins such as Facebook’s Diem and its Novi wallet reduces the potential of money creation. It strongly encourages countries low in the hierarchy of money to engage in a diverse set of regulations to mitigate these risks preemptively and proactively regulate to promote a dynamic payment system without the risk of currency substitution.