Discussions with central bankers at a conference a couple of years ago prompted economist Eswar Prasad to start writing what he anticipated would be a slim volume on how digital currencies could affect monetary-policy implementation. As he delved deeper into the world of digital technologies such as blockchain, cryptocurrencies, and stablecoins, however, he began to realize their potential to revolutionize, and potentially destabilize, financial markets and the international monetary system.
So much for the slim volume. Instead, Prasad wrote the The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, a 500-page book that has become a road map for money managers, market strategists, and others seeking to understand this new world. With a background in global trade, monetary policy, and financial regulation, including a stint as the International Monetary Fund’s top hand on China, Prasad has spent his career studying the global economic landscape. Currently an economics professor at Cornell University and a senior fellow at the Brookings Institution, he recently spoke with Barron’s about the “speculative mania” surrounding Bitcoin and the opportunities and risks inherent in moving away from traditional forms of money and finance. An edited version of our conversation follows.
Eswar Prasad:I don’t see a digital yuan posing a big threat to the U.S. dollar. I don’t think it’s a huge first-mover advantage, nor does it mean China will set the standard for the world. The traditional use case for a central bank digital currency, or CBDC—to increase financial inclusion—is weak in China because AliPay and WeChat Pay [payment apps owned, respectively, by Alibaba Group Holding (ticker: BABA) and Tencent Holdings (700.Hong Kong)] do a fantastic job of providing digital payments. China’s motivation for the digital yuan is different. [China] is concerned about the dominance of these two payment providers limiting innovation, but also making them economically and politically too powerful for Beijing’s comfort.
As we move toward a world [of digital currencies] where China’s cross-border interbank payment system can more effectively communicate with other countries’ systems, we can see less need for the U.S. dollar as a currency in international trade. As a payment currency, the U.S. dollar could lose some of its prominence, although it will remain the dominant currency. But a reserve currency needs not just economic size and financial power but also an institutional framework—an independent central bank, rule of law, an institutional system of checks and balances—that maintains the trust of foreign investors. China has made it clear it’s not going to undertake any significant institutional reforms. Even if the renminbi were to get a little more traction, I don’t see the renminbi seriously threatening the dollar.