Money in Crisis: The Return of Instability and the Myth of Digital Cash
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by Ignazio Angeloni and Daniel Gros
The debate over digital money is widening the divide between Europe and the United States. While the European Central Bank has once again sounded the alarm over the risks of cryptocurrencies, enthusiasm prevails across the Atlantic — to the point of indulgence.
Only days ago, Donald Trump pardoned Changpeng Zhao, the former head of Binance sentenced to four months in prison for money laundering. According to Reuters, Zhao had helped the Trump family develop a crypto business reportedly worth nearly one billion dollars.
If you find this confusing, you are not alone. So are we all. Let us set aside the criminal aspects for a moment and focus on the substance.
Are we truly, as crypto enthusiasts claim, on the verge of a historic revolution in how money is used for payments? Hardly.
Money has existed for five millennia and has always served the same function — roughly with the same risks and potential to benefit or harm the societies that use it.
“Evolution” is a better term, even for innovations that look revolutionary at first glance, such as paying for coffee by tapping a phone instead of pulling a coin from one’s pocket.
History and analysis of money can shed light on both the benefits and dangers of today’s innovations — a link that is too often overlooked. We explore it in a recent book, Money in Crisis, just published by Cambridge University Press
The history of money is, in essence, the story of a successful marriage between finance and technology. While its purpose — to transfer and store wealth — has remained constant, money has adapted to the most advanced technologies available in each era.
The Babylonians, masters of clay, used tablets. The ancient Greeks, inventors of coinage, struck metal. China’s medieval dynasties, pioneers of printing, created paper money. Each innovation met the same needs — and carried the same perennial risks: private fraud, covert expropriation by rulers, or technological obsolescence that made money lose credibility.
Today’s technology is digital. It is therefore natural — indeed inevitable — that money itself should become digital. The proper way to assess new forms of digital money is by asking how well they fulfill the essential functions of money, and how effectively they protect users from the age-old risks.
The key to success in every monetary era has been to strike a balance between public control and private contribution — the former safeguarding the public interest, the latter ensuring technical efficiency and cost-effectiveness.
Recent years have seen major progress in this partnership. Payment apps and mobile devices have made electronic transactions easy and secure. Settlement systems, guaranteed by central banks and their supervised institutions, ensure reliability.
The balance between public oversight and private innovation now provides unprecedented levels of safety and efficiency.
It is essential not to upset that balance.
Cryptocurrencies shift the pendulum too far toward the private side, producing instruments that are either unstable — like bitcoin — or risky for holders when regulation is inadequate, as in the case of stablecoins. There is little evidence that the advantages they promise are real or sufficient to justify their risks.
The digital euro, now under development at the ECB, is meant to respond to the threat posed by private digital money. But here, too, the pendulum could swing too far the other way — toward excessive public control that may prove unnecessary, costly, and inefficient.
This is why several other central banks have abandoned similar projects. A failure of the digital euro — quite possible in the absence of clear advantages over existing payment systems — would inflict reputational damage on the ECB and weaken the very “strategic autonomy” that the project seeks to bolster.
The ECB has recently reaffirmed its commitment, setting 2029 as a target date. That leaves plenty of time — to think again.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
