Recent policy moves by the United States to actively support cryptocurrency and crypto-asset development—including the establishment of a national Bitcoin strategic reserve—have sparked intense global discussion about the future of digital currencies. These digital assets represent a new form of money based on cryptographic technology and distributed ledgers. They are characterized by decentralization, traceability, and immutability, and can be used for transactions and as a store of value. Broadly, they include central bank digital currencies (CBDCs) and virtual digital currencies such as cryptocurrencies and stablecoins.
Their rapid development not only introduces new monetary forms and asset classes but also holds the potential to significantly reshape the international financial architecture.
Three Major Types of Digital Currencies and Their Features
Globally, three primary forms of digital currency have emerged: cryptocurrencies like Bitcoin, stablecoins such as USDT and USDC, and CBDCs including China’s digital yuan (e-CNY). Each type has distinct characteristics.
Cryptocurrencies
The value of a cryptocurrency is determined neither by sovereign credit nor by pegging to another currency or financial asset. Instead, it relies on complex computer algorithms. For example, Bitcoin is generated through “mining,” performed by high-performance computers solving mathematical puzzles. Its total supply is algorithmically capped at 21 million coins. With approximately 19.8 million already in circulation, only about 1 million remain to be mined.
Bitcoin’s most notable feature is its decentralized nature. It is not backed by any national government, and its fixed supply is often compared to gold. This structure is seen by some as a hedge against inflation and sovereign currency risk. However, its extreme price volatility remains a significant challenge. After reaching an all-time high of over $100,000 per coin, Bitcoin’s price corrected to around $86,000 by early March 2025.
Stablecoins
Stablecoins derive their value from being pegged to other currencies or financial assets. The most prominent examples, USDT and USDC, account for about 90% of the global stablecoin market. These are designed to maintain a 1:1 parity with the US dollar, hence often referred to as dollar-backed stablecoins. Other variants may be pegged to the euro, gold, cryptocurrencies, or a basket of commodities.
Each unit of stablecoin in circulation is supposed to be backed by a corresponding reserve of the pegged asset. This mechanism provides much greater price stability compared to highly volatile cryptocurrencies.
Central Bank Digital Currencies (CBDCs)
CBDCs are digital forms of a country’s fiat currency, issued and regulated by the central bank. They are backed by sovereign credit and maintain a 1:1 value with the traditional currency. A key advantage is the stability provided by the central bank’s role as lender of last resort, which minimizes financial risk.
However, the credibility of a CBDC is tied to the underlying national currency. If the traditional currency suffers from high inflation or exchange rate instability, the appeal of its digital counterpart will be similarly affected.
Bitcoin’s Impact on the Global Financial System
Despite being a form of digital currency, Bitcoin’s characteristics prevent it from fully performing standard monetary functions. Its high price volatility makes it unsuitable as a unit of account or medium of exchange for everyday transactions. Moreover, its fixed supply limits its ability to adapt to growing economic output, which typically requires a flexible money supply.
Thus, Bitcoin functions less like a currency and more like a distinct type of financial asset. There is ongoing debate about whether it constitutes a risk asset or a safe-haven asset. Its price volatility supports the former view, while its historical inverse correlation with the US dollar suggests it may serve as a hedge against dollar depreciation.
The Systemic Influence of Stablecoins
Among the three types, stablecoins pose the most significant potential impact on the international financial system. Because they are pegged to sovereign currencies—particularly the US dollar—they inherit some attributes of those currencies, including relative stability. This makes them more acceptable to a broad range of users.
The total market capitalization of stablecoins grew rapidly, approaching $180 billion by the end of 2024. They are gaining traction in several key areas:
- Trading Medium in Crypto Markets: Stablecoins, especially dollar-pegged ones, are increasingly used as the default medium of exchange in trading pairs involving Bitcoin, Ethereum, and other cryptocurrencies.
- Liquidity Provision in DeFi: In decentralized finance (DeFi) ecosystems, institutions are using dollar stablecoins to provide liquidity, including lending services.
- Wealth Storage in Unstable Economies: In developing countries with high inflation or volatile currencies, businesses and individuals are turning to dollar stablecoins as a reliable store of value and medium of exchange, sometimes replacing the local currency.
By bridging traditional and digital finance and filling the dollar demand gap in emerging markets, dollar-backed stablecoins could further reinforce the US dollar’s dominance in the global financial system. Their growing adoption in virtual environments may even extend the reach of dollar hegemony.
The Role of CBDCs in the International Financial Architecture
A CBDC is essentially a sovereign currency in digital form. Its credibility and stability depend on the strength of the national currency and the issuing central bank. However, its impact also depends on its functional scope.
For example, the digital yuan (e-CNY) is recognized for its stability but is currently limited to retail transactions—replacing cash (M0) in circulation. It is not yet approved for use in wholesale transactions between corporations, financial institutions, or interbank settlements. This limitation restricts its international adoption and use cases.
China’s cautious approach of limiting e-CNY to M0 is intended to minimize disruption to the commercial banking system. Expanding its application to broader monetary aggregates (M1 and M2) would significantly enhance its utility and support the internationalization of the renminbi.
Strategic Responses to Digital Currency Evolution
With three parallel developmental paths for digital currencies—cryptocurrencies, stablecoins, and CBDCs—each offering distinct advantages and risks, a diversified strategy is recommended. Relying on a single type may not be optimal; instead, a multi-pronged approach can maximize benefits while mitigating risks.
Key strategic priorities include:
- Expanding the functional scope of China’s digital yuan from M0 to M1 and M2, enabling broader domestic and international use.
- Developing RMB-backed stablecoins that leverage China’s sovereign credit and the global reach of its technology platforms. This would help internationalize the renminbi and counter the dominance of dollar stablecoins.
- Promoting the trial and adoption of a digital Special Drawing Right (e-SDR) at the IMF level. The SDR is a supranational currency basket comprising the US dollar, euro, renminbi, yen, and pound sterling. An digital SDR could encourage use in digital and virtual spaces, supporting a more diversified and resilient international monetary system.
A multi-currency digital future is preferable to a single-currency monopoly. Encouraging healthy competition among various digital currency models can lead to a more balanced and inclusive global financial ecosystem.
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Frequently Asked Questions
What are the three main types of digital currency?
The three primary forms are cryptocurrencies (e.g., Bitcoin), stablecoins (e.g., USDT, USDC), and central bank digital currencies (e.g., digital yuan). Each varies in backing mechanism, stability, and regulatory framework.
Why can’t Bitcoin function as everyday money?
Bitcoin’s high price volatility and fixed supply make it impractical for daily transactions and economic regulation. It behaves more like a speculative asset than a stable medium of exchange.
How do dollar-backed stablecoins strengthen the US dollar’s global role?
They extend the use of the dollar into digital and decentralized environments, serving as a medium of exchange in crypto markets and a stable store of value in countries with weak currencies.
What limits the wider use of China’s digital yuan?
Currently, e-CNY is restricted to retail payments and replaces only cash (M0). Its expansion into broader monetary aggregates and wholesale financing would increase its utility and acceptance.
What is a digital SDR (e-SDR), and why is it important?
An e-SDR is a digital version of the IMF’s Special Drawing Right, a basket of major currencies. It could serve as a neutral supranational digital currency, promoting monetary diversity and reducing reliance on any single national currency.
How can countries leverage multiple digital currency types?
By developing domestic CBDCs, supporting credible stablecoins, and engaging in international initiatives like the e-SDR, nations can diversify their digital monetary exposure and capture broader financial innovation benefits.