The emergence of digital currency has fundamentally reshaped the global financial landscape, marking a pivotal shift in how value is stored, transferred, and managed. Since the creation of Bitcoin in 2009, the evolution of digital currencies has accelerated, giving rise to two broad categories: private digital currencies and central bank digital currencies (CBDCs). This comprehensive review synthesizes key academic literature and policy discussions surrounding these innovations, with a special focus on China’s digital RMB (e-CNY), offering insights into their mechanisms, impacts, and future research directions.
Understanding Digital Currencies: Core Concepts and Classifications
Digital currencies represent a transformative leap in monetary systems, leveraging technology to redefine payment efficiency, financial inclusion, and monetary policy implementation. At their core, they can be divided into two distinct types: private digital currencies—such as cryptocurrencies and stablecoins—and central bank digital currencies (CBDCs), which are state-backed digital forms of fiat money.
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Private digital currencies like Bitcoin and Ethereum operate on decentralized blockchain networks, enabling peer-to-peer transactions without intermediaries. These assets derive value from market demand and cryptographic security rather than intrinsic worth or government backing. In contrast, stablecoins such as Tether (USDT) aim to maintain price stability by pegging their value to traditional assets like the U.S. dollar or government bonds. This makes them more suitable for everyday transactions while still operating within decentralized ecosystems.
On the other hand, CBDCs are issued and regulated by central banks. They come in two primary forms:
- Retail CBDCs, designed for use by individuals and businesses in daily transactions (e.g., China's e-CNY),
- Wholesale CBDCs, used primarily for interbank settlements (e.g., Canada’s CADcoin).
While private digital currencies have seen explosive growth—over 9,000 active cryptocurrencies existed as of early 2024—CBDC development is gaining momentum globally. According to the Atlantic Council, over 134 countries are exploring or piloting CBDCs, signaling a paradigm shift toward digitized national money.
The Rise of Blockchain Technology
Blockchain serves as the foundational technology behind most private digital currencies. It enables secure, transparent, and tamper-proof transaction records through distributed ledger technology. However, economic research highlights a critical limitation known as the "blockchain trilemma": it is nearly impossible to simultaneously achieve decentralization, scalability, and security at optimal levels.
Studies such as Abadi and Brunnermeier (2018) argue that blockchain-based payment systems often sacrifice efficiency for decentralization, making them better suited for high-value transfers rather than microtransactions. Meanwhile, Chiou and Koeppl (2019) note that mining processes behind cryptocurrencies like Bitcoin are resource-intensive and inefficient compared to centralized payment infrastructures.
Private Digital Currencies: Mechanisms, Markets, and Risks
How Cryptocurrencies Work: From Mining to Market Dynamics
Cryptocurrencies rely on consensus mechanisms—most commonly proof-of-work or proof-of-stake—to validate transactions and issue new units. The process of "mining" involves solving complex mathematical problems to add blocks to the chain, rewarding participants with newly minted coins.
However, this mechanism introduces significant costs and environmental concerns due to high energy consumption. Huberman et al. (2021) describe Bitcoin’s system as a “congestion queue,” where transaction delays occur during peak usage, undermining its viability as a scalable retail payment tool.
Moreover, the value of cryptocurrencies is largely speculative. Yermack (2015) concludes that Bitcoin behaves more like a volatile financial asset than a stable medium of exchange. Empirical studies show that investor sentiment—not economic fundamentals—drives price movements, leading to extreme volatility that limits widespread adoption for commerce.
Competition Among Digital Currencies
Multiple cryptocurrencies coexist in a competitive ecosystem. Garatt and Wallace (2018) demonstrate that because cryptoassets can be easily cloned or forked, their relative values remain unstable. This lack of uniqueness undermines trust and long-term valuation.
Fernández-Villaverde and Sánchez (2019) further explore the macroeconomic implications of crypto competition. Their models suggest that if decentralized digital currencies gain too much traction, they could erode central banks’ control over monetary policy, potentially leading to higher inflation and reduced social welfare. In extreme scenarios, a fully privatized monetary system may fail to provide optimal resource allocation due to profit-driven issuance rather than public interest.
Cryptocurrency Transactions and Illicit Use
A growing body of evidence indicates that a substantial portion of cryptocurrency activity is linked to illicit purposes. Foley et al. (2019) estimate that around 25% of all Bitcoin users and transactions are associated with illegal activities such as drug trafficking, money laundering, or darknet markets—amounting to approximately $72 billion annually.
Tasca et al. (2018) identify three phases in Bitcoin’s usage evolution: early experimentation (2009–2012), a period dominated by illicit trade (2012–2013), and a shift toward institutionalization post-2014. Despite increased regulatory scrutiny, Halaburda et al. (2022) confirm that illegal use remains prevalent, reinforcing the need for robust oversight.
The Emergence of Stablecoins
Stablecoins have emerged as a bridge between traditional finance and decentralized ecosystems. Classified into fiat-backed, crypto-collateralized, and algorithmic types, stablecoins aim to combine the benefits of blockchain with price stability.
As of 2024, over 85% of stablecoins are fiat-collateralized, with Tether being the largest by market capitalization. Their stability enhances usability in cross-border payments and trading within crypto markets.
However, risks persist. The collapse of the algorithmic stablecoin UST and its associated token LUNA in 2022 wiped out $50 billion in market value overnight—a stark reminder of structural vulnerabilities. Regulatory bodies including the Financial Stability Board (FSB) warn that unchecked growth in stablecoins could threaten financial stability by creating shadow banking risks and undermining monetary sovereignty.
Huang et al. (2023) find that stablecoins significantly increase the interconnectedness between crypto and traditional financial markets, amplifying risk transmission channels. For emerging economies like China, this raises concerns about capital flight through offshore stablecoin markets.
Central Bank Digital Currencies: Motivations, Designs, and Impacts
Should Central Banks Issue Digital Currencies?
The decision to launch a CBDC involves careful trade-offs between innovation and stability. Bordo and Levin (2017) support CBDC issuance as a way to modernize payment systems and enhance financial inclusion. Conversely, Brunnermeier and Niepelt (2019) adopt a neutral stance, emphasizing theoretical equivalence between private and public monies under certain conditions.
Cong and Mayer (2022) propose a strategic framework: nations with strong but non-dominant currencies benefit most from launching CBDCs early to gain first-mover advantages; dominant currency issuers like the U.S. may pursue CBDCs defensively; while weaker economies might opt to adopt foreign digital currencies instead.
Impact on Financial Intermediation and Economic Welfare
One major concern is whether CBDCs will disintermediate commercial banks by drawing deposits away from the private sector—a phenomenon known as financial disintermediation.
Keister and Sánchez (2023) show that while CBDCs may raise banks’ funding costs by competing for deposits, they also improve overall welfare by increasing payment efficiency and reducing transaction frictions. Dong and Xiao (2024) argue that under China’s two-tier operational model, where commercial banks distribute e-CNY on behalf of the central bank, the impact on disintermediation is minimal because CBDCs complement rather than replace bank deposits.
Additionally, interest-bearing CBDCs could serve as a new monetary policy tool. By adjusting CBDC yields directly, central banks could influence spending and investment more precisely—a form of “direct” monetary transmission.
Privacy Considerations in CBDC Design
Privacy remains one of the most debated aspects of CBDCs. Cash offers anonymity, whereas digital transactions generate traceable data trails.
Garrett and Van Oordt (2019) highlight that electronic payments enable price discrimination based on user behavior data, creating negative externalities for consumers. Agur et al. (2022) compare CBDC designs along anonymity-safety trade-offs: cash-like designs preserve privacy but may facilitate illicit activity; deposit-like designs enhance regulatory oversight but reduce user privacy.
Xiao (2022) proposes a balanced approach using tiered identity verification—allowing small transactions to remain pseudonymous while subjecting larger ones to KYC requirements—thus balancing privacy with compliance needs.
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CBDCs and Financial Stability
While CBDCs offer enhanced monitoring capabilities for regulators, they also introduce new risks—particularly during financial crises.
Keister and Monnet (2022) suggest that real-time access to CBDC transaction data allows central banks to detect stress signals earlier than traditional reporting systems. However, they caution against the risk of “digital runs,” where panicked depositors rapidly convert bank balances into risk-free CBDCs during downturns—an event that could destabilize the banking system.
This risk is mitigated under dual-tier architectures like China’s e-CNY model, where commercial banks act as intermediaries between users and the central bank.
Digital RMB (e-CNY): Policy Debates and Development Trajectory
China leads global efforts in CBDC deployment with its digital RMB pilot program launched in 2019. As of 2024, e-CNY has been tested across 26 regions spanning 17 provinces—including full provincial rollouts in Guangdong, Jiangsu, Hebei, and Sichuan.
The M0 and Retail Focus Debate
The People’s Bank of China defines e-CNY as a digital form of M0—cash in circulation—and positions it as a retail payment instrument. This classification ensures it does not bear interest and avoids disrupting bank deposit structures.
However, some experts question whether this narrow focus limits its potential. Zhou Xiaochuan (2023) acknowledges that e-CNY should not be equated solely with physical cash—it represents an upgrade in payment infrastructure with programmable features.
Lu Lei suggests that future iterations could incorporate smart contracts with interest-bearing capabilities, potentially expanding e-CNY into broader monetary aggregates like M2. Mu Changchun (2022) envisions gradual expansion into wholesale applications such as interbank settlements using programmable features like Delivery-vs-Payment (DvP).
Yet challenges remain. Xie Ping notes that commercial banks lack incentives to promote e-CNY under the current two-tier system due to limited profitability. Additionally, consumer inertia favors existing mobile wallets like Alipay and WeChat Pay.
Cross-Border Applications and Internationalization
Although e-CNY is primarily designed for domestic use, its role in cross-border payments is evolving through initiatives like the mBridge project—a multilateral CBDC platform involving China, Hong Kong, Thailand, UAE, and others.
Song Shouwen (2023) compares technical approaches such as corridor networks versus hash time-locked contracts (HTLC), concluding that corridor models suit fixed or managed exchange rate regimes common in emerging markets.
While full capital account convertibility remains distant for the RMB, e-CNY can facilitate trade settlements and tourism-related payments without replacing foreign currencies outright—a pragmatic path toward internationalization.
Future Research Directions for CBDCs and e-CNY
Despite rapid progress, many unanswered questions demand rigorous academic inquiry:
Optimal Design of e-CNY
Current design choices prioritize stability over functionality. Future research should explore how features like controllable anonymity, programmability, or interest-bearing mechanisms affect adoption rates among different demographic groups.
Could e-CNY serve as a competitive check on private payment platforms? Even low usage could enhance market contestability and curb monopolistic tendencies in digital payments.
Cross-Border Use Cases
Empirical analysis is needed on how e-CNY performs in real-world cross-border pilots. How do regulatory frameworks interact across jurisdictions? Can mBridge reduce settlement times and counterparty risks?
Further study should assess implications for global reserve currency dynamics as well as safeguards against illicit flows.
Two-Tier Architecture Implications
China’s reliance on commercial banks for distribution raises questions about data governance. As wallet providers collect usage data, how will this affect competition in data markets?
Centralized oversight must balance innovation with systemic resilience—especially when integrating diverse third-party platforms into a unified system.
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Monetary Policy and Financial Stability Effects
Will e-CNY enhance or distort monetary transmission? With granular data access, could central banks implement targeted policies at individual or firm levels?
Simultaneously, researchers must model potential destabilizing effects—such as sudden shifts from deposits to CBDC during crises—and propose mitigation strategies like holding limits or tiered remuneration.
Expanding Pilot Programs
Ongoing experiments include:
- Programmable subsidies using smart contracts,
- Integration with social welfare programs,
- Testing in B2B settlements,
- Expansion into offshore scenarios along Belt and Road corridors.
These pilots provide rich datasets for evaluating macroeconomic impacts on investment, consumption patterns, and overall welfare—an area ripe for theoretical modeling and empirical validation.
Frequently Asked Questions (FAQ)
Q: What is the difference between cryptocurrency and CBDC?
A: Cryptocurrencies are privately issued, decentralized digital assets without government backing (e.g., Bitcoin). CBDCs are sovereign-issued digital versions of national currency (e.g., e-CNY), fully regulated by central banks.
Q: Is e-CNY replacing cash completely?
A: No. The PBOC emphasizes coexistence between digital RMB and physical cash for the foreseeable future. e-CNY aims to complement—not eliminate—existing payment methods.
Q: Can I earn interest on e-CNY holdings?
A: Currently no—the PBOC treats e-CNY as M0 equivalent cash—and thus non-interest-bearing. However, future versions may explore interest-bearing models via smart contracts.
Q: Does using e-CNY compromise personal privacy?
A: The system supports “controllable anonymity”—small transactions remain pseudonymous while large transfers require identity verification to prevent illicit use.
Q: How does e-CNY affect commercial banks?
A: Under the two-tier model, banks retain critical roles in distribution and customer service. This minimizes disintermediation risks while leveraging existing financial infrastructure.
Q: Will e-CNY help internationalize the RMB?
A: While not designed to replace USD globally, e-CNY facilitates smoother cross-border trade via projects like mBridge—potentially enhancing RMB usage in regional commerce without full liberalization.
This review underscores that while digital currencies present transformative opportunities, their design profoundly influences economic outcomes. As global experimentation continues, rigorous research—particularly on real-world implementations like e-CNY—will be essential for shaping safe, inclusive, and efficient monetary futures.