Livio Stracca  00:02

There is little doubt that the payment side will be disrupted.

 

Tim Phillips  00:08

Digitalization meet money. My guest today believes that for the monetary system, today’s digital innovations are going to change everything. Today on VoxTalks Economics, redefining the monetary standard in the digital age. Welcome to VoxTalks Economics, I’m Tim Phillips. Bitcoin, stable coins, central bank digital currencies, new forms of money are appearing wherever we look, but how well do they work? Are they going to compete, or will one dominate? And what new ways of using money are becoming possible. Livio Stracca of the European Central Bank has recently published a book on how new tech might redefine the monetary standard. He joins me now. Livio, welcome back to VoxTalks Economics.

 

Livio Stracca  01:18

Thank you, team, and thanks for inviting me. I’m happy to be here.

 

Tim Phillips  01:26

Livio, you work at the ECB, and you understand very well how the current system is working. You even help to keep it working, I guess. Why is this the time to step back and ask whether it needs to be redesigned?

 

Livio Stracca  01:42

That’s a very good question, of course. So, I guess my first answer would be that one should not be complacent. The system works relatively well, not perfectly, but well enough. Where the biggest disruption now, due to digitization and other trends, is more on the payment side of money, so that money as a medium of exchange is about how we exchange money. You know, more than the definition of money itself. But as I argue in the book, you know the two aspects are also interrelated, and I think if you want to go towards a better monetary system, we should keep studying that, and central banks should keep competing and also be kind of a frontier. So, I guess it’s a plea against complacency. There is little doubt that the payment side will be disrupted in this context, of course, central banks should fight to keep central bank money as the anchor of the system. So, in that sense, it’s also a defensive approach to remain relevant in a very new environment.

 

Tim Phillips  02:31

I guess one of the reasons we don’t tend to think about this day to day is that the monetary system we have now has been very resilient. It survived the great inflation, financial crises, pandemic, without changing a lot. So, what’s different about right now, 2026?

 

Livio Stracca  02:50

We live in a margin system, the fiat money system. It’s basically a system where money has no intrinsic value, it’s not tied to gold or other metals, essentially since the early 70s. So, it’s not that long ago, and it is since the mid-80s or late 80s that we are in the so-called grid moderation regime. So, where inflation is low and stable, with some fares up like we saw in 2022 and unfortunately we might be seeing now with the US-Iran war, but generally, you know, the system has been stable despite the global financial crisis, the pandemic. So, it’s been proved to be resilient for quite a long period of time. But as I said before, on the payment side, there’s been quite some innovation. I mean, the role of cash has really declined. When I start writing a book, I was under the impression that cash will be resilient, that cash will still be used and in demand, but after renewing the evidence, and I have a chapter on cash in the book, I concluded that there is quite some evidence pointing to a smaller role. On the payment side there has been quite a change. We experience this in our everyday life. Most payments are made using a credit card, and a credit card is a way to mobilize bank deposits. So, the instruments that so far I want the battle in terms of minimum change are bank deposits, but this may not last forever. So, I think on this side there’s been quite some evolution

 

Tim Phillips  04:05

For the system to change someone has to want it to change. Who does want it to change? The consumers or governments or banks or the tech companies? And if they all want change, can they all be satisfied by the change we’re going to see?

 

Livio Stracca  04:20

Part of the kind of push to change comes from the financial sector itself, I would say. So now we have fintech, so on the payment side there is a lot of innovation coming from the financial sector itself, and the integration with our phones, and I mean our lives have become more digitalized in general. So I think the financial sector is adapting to this and is making this easier to use, and you can see the same trend also in other dimensions, like for the stable coins. One big appeal of stable coins, and this was the case in particular with the first proposal, which was Libra, was their potential link to social media, which, by the way, also makes them dangerous to some extent for privacy, and so on, but certainly the ability to link big tech, social media, and payments is quite an important push, and we have seen that happening, for example, in China. I mean, China has also been a bit of a pioneer in this sphere. What I also described in the book, that all this is less related to the traditional discussions in market economics about what is a unit of account. What determines the price level inflation? These traditional questions, but they are also related, of course. In a world where we use stable coins or bitcoin, these discussions are not too far away, and it also, I mean, the inflation we saw in 2022 was also a bit of a wake-up call, showing that even if the system is now in speaking terms of inflation control seems to work well, I mean, it’s not perfect. There’s been a redistribution of resources, for example, coming out to this episode, and we heard discussions about the end of the great moderation coming back to the 70s. I mean, these discussions were a bit sealing in that kind of extreme form, but the question, whether the system is really so robust, I think we should ask ourselves.

 

Tim Phillips  06:00

You mentioned the phrase unit of account, which takes me back to studying economics. We all learn students everywhere learn at the beginning of their economics course what the definition of money is, something that they hadn’t thought of before, but something they would be studying for the next few years. What within that definition of money does a new form of money have to do well in order for it to survive as money?

 

Livio Stracca  06:26

So, there was an older discussion in the 70s, which was introduced by an Austrian economist called Hayek. I mean, he’s also famous for other things, he’s not only an economist. The story was the following: so, like in other goods and services, so why don’t we let currencies compete and the best one wins. For example, the money that provides the most stable prizes will be used by most people, and it will push out the others. But this idea has been, has been refuted already at the time, and also more recently, again in a more formal, quantity way. So, essentially suggested that free competition doesn’t work for money, so it’s a natural monopoly. There are a lot of network externalities, and nationality means that if I use something, you are also more likely to use it as well. So, the more people use something, the more convenient it is for a marginal consumer to use it. I mean, think of, for example, if you are in an English-speaking country, it’s much easier to speak English than to start speaking Chinese. So, there is a kind of the majority wins, if you want, and so this applies very much to money as well. It’s not like a free competition market where you can enter and compete, it’s more like that there is an incumbent, so there is, I don’t know, the British pound in the UK, the euro in Europe, the dollar, and these are, you know, already established monetary standards. They are also linked to the state as well, so there’s this kind of strong state backing. So, all of this makes this idea of free competition and what is the best form of money a bit difficult to establish. So, any form of money should guarantee low inflation, stable prices, and what we are seeing is that countries that mismanaged their monetary standards ended up having those monetary standards scrapped. A famous example is Zimbabwe, but there are many, many others. So, at some point, if you have hyperinflation, your money becomes toilet paper or the like. So, if you have a civilly mismanaged currency, then there is real competition, and then sometimes you have dollarization. So, countries adopting the monetary standard of another country, but if things don’t get so bad, what tends to happen is more that the established currencies continue to exist, so there is a lot of inertia in this choice.

 

Tim Phillips  08:29

Nevertheless, in the use of cash declining, you already mentioned that nobody seems to mind that very much at the moment. Could it just fade away in an orderly way?

 

Livio Stracca  08:42

This is another interesting question that I described in a chapter in the book. I guess there are a lot of advantages in reducing the role of cash. You know, I personally hate paying in cash, to be honest. In the German-speaking country, it’s still widespread. If cash is kept as a reserve in bad times, so in times of disasters, blackouts, and so on. I’m personally worried that if we never use it, it’s not going to be there when we need it. So, I argue that countries should have plans to use it, because if you never use something and then there is a blackout, I mean, I wonder if really it will be available. And one recent discussion, which I elaborate on is so one of the arguments in favor of eliminating cash is that cash leads to crime. And then the question is, should we close all avenues to crime, because, of course, we live in lawful countries, and so on, and we believe that it’s always good to reduce crime, but you can see it also in authoritarian regimes, for example. It’s not a given that we should drive the so-called crime to zero by having front with digital form of money that were illegal, transactional, or impossible, because you know you might want to leave some room for breathing, for the system to breathe, or some safety valve if you want, and if you eliminate cash completely, this is it. I mean, of course, this is not like an encouragement to crime, to do crime, but perhaps is a kind of caution against a more extreme interpretation of that idea, though that eliminating crime.

 

Tim Phillips  10:05

Where I live, Livio, most of the places don’t take cash anymore. I haven’t carried any around for ages. You’d be right at home here.

 

Intermission  10:17

We are talking about new forms of money more often on VoxTalks at the moment. Most recently, we spoke to Gilles Moec during our coverage of the CEPR Paris report on Global Imbalances. He spoke to us about the part that stable coins may play in helping the US relieve stress on its external position. Listen to the episode Stablecoins and Global Imbalances from the 13th of April. You’ll find it wherever you get your podcasts.

 

Tim Phillips  10:53

So, Livio, for any new forms of money, you describe that there is a payment trilemma that any digital system can offer. It can offer access, it can offer security, it can offer privacy, but it can’t offer all three simultaneously. So, what does that imply, the trade-offs that we’re making, when we think about a new form of money?

 

Livio Stracca  11:16

Economics is a science that is full of trilemma. I know at least half a dozen of times, several ones, and sometimes also it’s easier to publish in economic journals. We need to take some caution there. So, having said that, this particular payment trilemma is an interesting concept, because basically it shows that I just pick one, two elements of this trilemma, so having universal access and having privacy. So, if you want everybody to participate in the system, you want to eliminate fraud in the form of untruthful transactions. So, transactions that did not really take place. You cannot do that by granting full privacy to transactions. So, you need to ensure that there is a transparency in transactions, so everybody can see what is happening. Because one big problem with these decentralized ledgers is the incentive to rewrite history. So, if we are in a decentralized ledger, there’s no third party managing it. If I give you some good or service and you have to pay me, you have all the incentive to say, I never received these goods, I don’t owe you anything, so you have an incentive to rewrite history later. So, it must be very hard to rewrite history, and one way in which this is made hard in decentralized ledger, for example, the Bitcoin blockchain ledger, is by making transactions very transparent, and also they are piled up on top of each other. That’s why it’s called blockchain, so that if you want to reverse expose the transaction, you have to reverse all the transactions that have been put on top of them. So, the decentralized ideal, which looks very appealing, has a number of consequences and creates a number of restrictions about what you can do or cannot do,

 

Tim Phillips  12:57

And if there are trade-offs that are made between access, security, privacy. Who gets to decide where those trade-offs are made?

 

Livio Stracca  13:07

That’s an interesting question. Because I guess by the nature of this decentralized ledger, at least in theory, there is no single decision maker, or maybe the decision maker is the person or entity that designs the system in the first place, so I guess in some cases implicitly these choices are made by design. So, one could argue that in the Bitcoin blockchain, the decision in this payment dilemma to sacrifice privacy of transactions is probably implicitly made by the creator of this system. So, this is another interesting dimension that sometimes these choices are made without a democratic support. Sometimes the technology itself has these choices made implicitly, and maybe you don’t realize, so definitely it’s very good to think in those terms about who takes the decision and what decision has actually been taken in the design of the system.

 

Tim Phillips  13:56

Let’s talk about some of these new forms of money. You’d say that the Bitcoin blockchain solved a real problem but chose the wrong token. What are you talking about?

 

Livio Stracca  14:05

The problem that they were trying to solve, they actually largely solved was to, how to avoid the double spend problem. So, yeah, it’s a bit related to what I was saying before. You have a network of, say, people who want to pay to each other or make transactions, and nobody’s managing the system, this is decentralized, so everybody has the incentive to cancel previous transactions that are disadvantages for them. So, in the book, I make the example: suppose that a village wants to write a spreadsheet with all transactions, so everybody has access to this spreadsheet. Of course, I have all the incentive to delete the rows of the spreadsheet where I am in debt. So, how does one avoid that, and so the Bitcoin white paper was a very good solution to a problem, which actually in computer science had been addressed for decades. So, it was a significant breakthrough in this sense. I mean, it created other problems because it makes the transactions very slow and costly to do, but at least it solved that issue of creating a decentralized ledger, without the double spend problem. Because this was supposed to be a decentralized ledger that did not involve financial institutions like banks. The creators of the system thought, with good reason, that they could not rely on an existing currency. So, if this system was based on the US dollar, for example, it would have forced this network to rely on US banks, on the Federal Reserve, and so on. They didn’t want that, so they want to have a system which was self-sufficient. So, they created this Bitcoin, which is a token, which is the form of money that is exchanged in this blockchain. And they thought that they wanted to make it stable in terms of volume, and they thought that the more it’s similar to gold – some people call it the digital gold – the more stable the price will be in the long term. Gold is supposed to be like a valuable asset, doesn’t depreciate over time, where inflation is not possible in big numbers, and so on. So they created a supply system that very much tries to mimic the supply of gold, or the fact that it is difficult to mine gold, and this is where also I think they mostly fail, because economists have argued that gold is not a good monetary anchor, so what has happened with Bitcoin in the end is that it is true that it has been increasing in value, so the price has been rising over time, but with a lot of volatility, which is the same even more in this case that we have seen for gold. I mean, gold prices did have a lot of volatility because of gold market specific events, a mine was discovered or was not discovered in the case of Bitcoin. This has become even more extreme, so you have this kind of upward trend, but with a huge volatility, and this makes it not a good form of money.

 

Tim Phillips  16:31

So, to take away that volatility, we now have stablecoin, something that’s interesting economists a great deal at the moment, and they do solve the volatility problem. Do they create other problems?

 

Livio Stracca  16:43

That’s exactly right. So, at some point, those who were in favor of the crypto asset ecosystem, or were living in that ecosystem, realized that the Bitcoin, because of this extreme volatility, is not the good monetary anchor. So, they started to develop something different, and the most obvious choice was to peg these new crypto assets to an asset that has proved its value, and here we go back to this question we had at the beginning of the great moderation. So, we know now we have been known for 40 years how to control inflation. So, this means the central bank money is stable. So, pegging stable coins to central bank money makes a lot of sense. I think this is a good side of stable coins, that they still maintain the good innovation of the blockchain, the decentralized ledger, but the coin that they exchange is quite a bit of an improvement. If we talk about a monetary asset compared with the original Bitcoin, it creates other problems. First, it potentially competes with the banks, so it may disintermediate the banks, and also this strong potential, at least linked with big tech, which is a possible advantage, is also a threat, not least because it would lead to an outflow of data. I mean, big tech are very interested in our data, so that we should use payments to look at our data, but it’s a question also autonomy, meaning many of these big tech and these stable coins are US-based, so there is a lot of question now in Europe. Should we really be reliant on US money even more than we do now? Because we are already reliant on US credit cards in payments, but if US stablecoins take over as a means of payment, this would imply even more reliance on US.

 

Tim Phillips  18:16

Stablecoins are often spoken about in the same breath as central bank digital currencies. Your colleagues at the ECB are considering a central bank digital currency, as many other central banks are as well. What problem does a central bank digital currency solve?

 

Livio Stracca  18:36

I would say, first, it’s a direct reaction to the disappearance of cash in payments, we used to have a system which was built on central bank money, where bank deposits, which is a private form of money, the value of this form of money is built on central bank money. So now, if cash completely disappears, and in some countries it’s happening already, you know, we lose the anchor the system. So, we lose the first element of the whole pyramid of money. So, the interest in digital currency is partly to restore this order between central bank money and private form of money, knowing that bank deposits or private form of money will always be dominant in quantity terms. But I think it’s still good that the central bank is able to offer some form of central bank money, that’s one aspect. In Europe, there is an additional point, which is a fragmentation of payments. I mean, we don’t have a European card system. Basically, if you want to pay in other countries, we have to rely on American credit cards. I mean, there are initiatives to overcome that, but to have an asset that is legal tender in each and one individual country, you know, is seen as an advantage to have more integration in payments, because the legal tender must accept payments with the digital currency, with a central bank digital currency, it’s an obligation. You already create, like a European-wide payments system just by that. And the third element in Europe is also, again, the issue of not being too reliant on American credit cards.

 

Tim Phillips  19:57

One aspect of this that I hadn’t thought about a lot, that you reference in the book, is programmable money. What is programmable money? Who would find that useful?

 

Livio Stracca  20:07

So, programmable money means essentially that a payment is conditional. Not only is conditional, which I guess can be done already now in some cases, but it’s conditional on an independent check that can be done even by a machine. So, for example, I pay my daughter when I’m healed. I suppose there is an independent way to check this. Some people refer to the internet of things, and so on. This kind of conditional payment is made possible by decentralized ledgers. It is theoretically possible in traditional systems, but it’s hard to do. Whenever I talk about this with people, I hear different views, whether this is really desirable or not. I mean, some are enthusiastic about this option, but there is also a lot of skepticism. But if this becomes an established practice, it could be a substantial improvement.

 

Tim Phillips  21:02

I guess one of the things you do is to look ahead to what might happen by 2050, so let’s be a little bit speculative. Now I note that you reference that Chile has a unit of account that is updated daily for inflation, and your idea is that a redesigned monetary standard could be indexed. What would it mean if we had a monetary standard that was indexed for inflation?

 

Livio Stracca  21:30

Let me start from your second question. So, what I argue in the book is that the digital form of money reopens the case for an idea that has been around for a century now. Namely to use an index unit of account as a form of money. So, you have an asset that is pegged to the consumer price index. So, suppose that we have an asset that always has constant value vis-a-vis the consumer price index, and this is the case, for example, in Chile with this Unidad de Fomento. In Chile, for example, the Unidad de Fomento is used as a price index in mortgages in long-term contracts, so not in all transactions, but in some. So, if we could expand the set of prices that are denominated in this index unit of account, we could essentially have price stability by design. So, we don’t need really monetary policy, and given the inflation control errors that we sometimes have, I mean, the system works well, but not perfectly, I think potentially could be an improvement. So, I don’t argue in the book that we should necessarily move there. And I come to your first question about money in 2050. So, I’m not predicting or arguing that we will go there in 2050, but I think more attention should be given to this idea, because it is made relatively more feasible in a digital context. So, this is one possible direction in which the motorista could evolve. I mean, maybe one country might try it, or who knows, but it’s an option that we should keep discussing.

 

Tim Phillips  22:48

I can imagine national accountants flinching when you said it’s potentially easier to do. You would need a reliable price index, and a representative price index, and also something that nobody could manipulate. Does that exist?

 

Livio Stracca  23:03

You’re totally right. I have a section in the book where I discuss this, but I mean, just keep in mind that this is the case already now. We have price stability, or we have low inflation defined in a price index, a statistical agency computes. So, if statistical agency cheats, this is a problem already now, not only in this system, so yeah.

 

Tim Phillips  23:21

Yeah. Mentioning Hayek, of course, his name is coming up more and more now that we see these new forms of money evolving. He wanted that competition. As you say, others concluded that one or very few forms of money would naturally win out. Can all these new forms of digital money coexist?

 

Livio Stracca  23:41

Personally, I would expect that in each jurisdiction there will be a dominant form of money, probably there will be more heterogeneity in terms of payments, there will be more options in how we pay, so the medium exchange function. One interesting test of high-ex way of thinking is in the international context, I mean, in the world economy, in theory, all currencies could be used, so there is a competition and we know what happens, that the dollar is winning the competition. Is it good or bad? And it’s hard to say whether there is a better currency out there that would outdo the dollar. So already in that context you see that a strong tendency towards one form of money prevailing. So, I don’t think that this will change necessarily in the future.

 

Tim Phillips  24:21

You work at the European Central Bank, and the European Central Bank is a very unusual institution. 19 countries there will be very different economies across those countries, one monetary policy. In this digital transition, is Europe going to have more challenges than other countries?

 

Livio Stracca  24:45

So, I suppose the problems are similar. I think in Europe we have the additional challenge of becoming an integrated market. It’s only halfway through, and according to some, including some of my colleagues, this new digitalized world, it’s also an organization, as well, is a way to leapfrog these barriers. So in this sense, could be a bigger opportunity for Europe than for other economies, because we have to deal with our fragmentation. Of course, we all hope that Europe will remain competitive in all areas, and we have a strong rural law, so this is always helpful for finance and money and finance in this sense, I think we are in strong position.

 

Tim Phillips  25:25

Let’s reconvene in 2050 and find out what actually did happen. Thanks for talking about this today.

 

Livio Stracca  25:31

Thank you, Tim. I appreciate it.

 

Tim Phillips  25:42

The book is called Redefining the Monetary Standard in the Digital Age: Digital Innovations and the Future of Monetary Policy, the author, Livio Stracca, and is published by Springer Nature, 2025

 

Outro  25:55

VoxTalks Economics is a talk normal production. The assistant producer is Megan Bieber, and our editor is Andrei Zagarian. Next week on VoxTalks Economics, how well does patent screening work?