Monetary sovereignty: digitalization and the CBDC trilemma

Abstract

Digital transformation has put significant pressure on monetary sovereignty. This pressure is channeled through the introduction of private digital payment services, cross-border operations, currency substitution, and the internationalization of foreign currencies. While most contemporary research views the introduction of a central bank digital currency (CBDC) as a key option for safeguarding monetary sovereignty in the digital age, we argue that the link between monetary sovereignty and CBDC adoption may be somewhat overstated. First, our empirical test shows that current progress in CBDC adoption is more closely correlated with indicators of financial development and innovation than with indicators of crypto ecosystem development. Second, considering the CBDC as a means to enhance the currency’s international status necessitates greater involvement in the competition to attract numerous non-resident users, which can potentially disconnect the design of the CBDC from the internal goals of its adoption. Third, this competition gives rise to a trilemma of incompatibility between monetary sovereignty, global acceptance of the CBDC design, and internationalization of the central bank’s digital currency. Nevertheless, this does not imply that central banks should refrain from investing efforts in preparing for further digital transformations. Rather, it means that monetary sovereignty should not be seen as absolute.