Central bank digital currencies represent a programmable liability of a central bank that can alter the form and reach of money. The Bank for International Settlements argues that digital legal tender could change the speed and granularity of monetary transmission, while the International Monetary Fund highlights implications for cross-border use and reserve currency status. Eswar Prasad at Cornell University describes motivations that include declining cash use, competition from private stablecoins, and the desire to improve payment efficiency and inclusion. Those institutional assessments establish relevance by linking CBDC design choices to core functions of money and financial stability.

Monetary transmission and exchange-rate dynamics

Design features such as interest-bearing accounts, limits on holdings, and interoperability rules shape how CBDCs interact with bank deposits and foreign currency demand. Researchers at the Federal Reserve and the Bank for International Settlements caution that unrestricted retail CBDC access to central bank balances can induce deposit substitution in stressed conditions, increasing liability flight to safe central-bank money. Hyun Song Shin at the Bank for International Settlements notes that such shifts alter capital flow elasticity and may amplify exchange-rate movements for small open economies that rely on foreign currency borrowing.

Cross-border payments, remittances, and territorial impacts

Cross-border arrangements determine whether CBDCs ease frictions or fragment currency markets. The World Bank and the Bank for International Settlements find that well-governed CBDC corridors can lower remittance costs and speed settlement, benefiting migrant-receiving territories and island economies where remittances comprise a large share of household income. Evidence from Tavneet Suri and William Jack at the Massachusetts Institute of Technology on mobile-money adoption in Kenya illustrates how digital payment platforms reshape livelihoods and local commerce, a cultural and territorial transformation likely to recur under CBDC deployment.

Operational risks, sovereignty, and policy choices

Cybersecurity, privacy trade-offs, and governance frameworks make CBDC impact heterogeneous across jurisdictions. The International Monetary Fund emphasizes coordinated standards to avoid regulatory arbitrage and competitive devaluations, while the Bank for International Settlements underscores the need for crisis backstops to prevent destabilizing runs. The net effect on global currency markets will depend on policy design, interoperability agreements, and institutional capacity, with unique outcomes tied to each economy’s monetary structure, remittance dependence, and digital infrastructure.

Exchange rate stability matters because it shapes prices for imported goods, wages in tradable sectors, the value of remittances, and tourism competitiveness, with direct consequences for household purchasing power and public finances. Evidence from the Bank for International Settements presented by Claudio Borio at the Bank for International Settlements indicates that volatile exchange rates amplify financial cycles and complicate monetary policy choices in open economies. Carmen Reinhart of Harvard University documents historical links between sharp currency depreciations and subsequent deep economic contractions, underscoring the human and territorial stakes when stability falters.

Monetary tools and transmission

Central banks influence exchange rates through conventional interest rate policy, foreign exchange intervention, balance sheet operations and public communication. Interest rate adjustments alter domestic yields and attract or repel capital flows, a mechanism summarized in research by Claudio Borio at the Bank for International Settlements. Direct intervention in foreign exchange markets affects liquidity and can smooth abrupt disorderly moves when reserves and market access allow, a role emphasized in analyses produced by the International Monetary Fund and the Bank for International Settlements. Quantitative easing and large-scale asset purchases in major currencies create cross-border spillovers that change asset valuations elsewhere, an effect analyzed in IMF reports and by central bankers in official speeches.

Impacts on societies and territories

Exchange rate shifts translate into tangible social effects in different territories. Small island developing states and commodity-dependent economies experience amplified effects on import costs and public debt servicing, a pattern identified in World Bank and International Monetary Fund country studies. Cultural sectors that depend on inbound tourism face changes in demand when currencies appreciate or depreciate, while agricultural exporters confront altered competitiveness that reshapes rural livelihoods. Historical research by Carmen Reinhart of Harvard University and others links currency crises to banking distress and long recovery periods, showing how monetary policy outcomes can persistently affect employment and regional development.

Policy credibility, transparency and international cooperation are central to dampening destabilizing movements. Analyses by Claudio Borio at the Bank for International Settlements and institution-wide reports from the International Monetary Fund argue that clear frameworks, well-communicated interventions and coordinated responses reduce ambiguity in markets and help restore orderly pricing, thereby mitigating social and territorial disruptions associated with volatile exchange rates.