Digital Currencies and Monetary Hegemony Part II of III: The Rise and Diffusion of Digital Currencies｜News from the Institute of Geoeconomics(IOG)

3. The Rise of Digital Currencies

3.1 Digital currencies

Broadly defined, “digital currency” refers to electronic and digital forms of money other than physical cash, such as banknotes and coins. This includes electronic money such as Suica and PayPay in Japan, crypto assets such as Bitcoin and Ethereum, CBDCs and stablecoins.

Electronic money is already widely used as a substitute for cash. But this article focuses mainly on CBDCs and stablecoins because of their significance for reserve currency dynamics, while also covering crypto assets.

3.2 Crypto assets

Crypto assets are easiest to understand through Bitcoin, the best-known example. Bitcoin is a decentralized digital currency proposed in a 2008 white paper by Satoshi Nakamoto. It uses a distributed ledger known as blockchain and has no centralized administrator. Transactions are finalized through mutual verification. Unconfirmed transactions are grouped roughly every 10 minutes into blocks, which are then approved collectively. Once approved, they are added to the end of a single chain recording all Bitcoin transactions since its creation. This is why the system is called a blockchain.

Bitcoin transactions are approved by other participants. Specifically, the first participant to solve a complex calculation validates the transactions. Solving this calculation first requires large numbers of specialized machines and substantial computing power. This process is known as “mining”. Mining entails significant costs, including the purchase of machines and the electricity needed to operate and cool servers. Participants nevertheless mine because the winner receives Bitcoin as a reward. This mining reward is designed to halve every four years, a process known as the Bitcoin halving. The next halving is expected in 2028. Bitcoin’s total supply is capped at 21 million BTC, and this scarcity is often cited as the source of its value.

Governments have therefore taken notice. In September 2021, El Salvador designated Bitcoin as legal tender, though it does not appear to have been widely used by the public.

But crypto assets are highly volatile. In 2014, Mt. Gox, then the world’s largest Bitcoin exchange, lost a large amount of Bitcoin through hacking. More recently, Bitcoin reached a record high above $126,000 on October 6, 2025, before falling. As of April 7, 2026, it was trading below $70,000.

Bitcoin was originally expected to be used for remittances and payments, especially compared with other crypto assets such as Ethereum. Yet its volatility is a major obstacle to such use. Today, it is more commonly seen as a high-risk investment asset for those expecting substantial capital gains.

3.3 CBDCs

A central bank digital currency, or CBDC, is a liability of the central bank that issued it. In the case of a yen-denominated CBDC, it would be a yen-denominated liability of the Bank of Japan and, from the holder’s perspective, a risk-free electronic form of banknote.

CBDCs can be divided into two types. The first is wholesale CBDC, provided to limited counterparties mainly for large-value settlement among financial institutions. The second is general-purpose, or retail, CBDC, designed for use by individuals and ordinary companies. Wholesale CBDCs share some functional similarities with existing central bank reserves, which banks already hold at the Bank of Japan and use for electronic settlement. However, some argue that wholesale CBDCs using distributed ledger technology could improve the efficiency of securities and derivatives settlement.

Major economies have taken different approaches to CBDCs. In Japan, the Bank of Japan published its basic approach to CBDCs in 2020 and has since conducted technical verification. In 2023, it moved to a pilot program and established a CBDC Forum to incorporate private-sector expertise. The Ministry of Finance has also convened an interagency liaison meeting with the Bank of Japan to examine institutional issues. The government and the BOJ emphasize that no decision has been made to issue a CBDC and that any issuance would require national debate. At the same time, they have continued preparations. Current directions include a two-tier structure involving intermediaries between the BOJ and end users, and a non-interest-bearing CBDC. The latter appears intended to avoid destabilizing the financial system through a shift of funds from private bank deposits into CBDC.

3.4 China and the Digital Yuan

Although not stated explicitly in policy documents, one driving factor behind Japan’s CBDC preparations appears to have been concern over falling behind China, which had moved early on CBDC development. As discussed below, however, China’s CBDC plans have changed significantly, while the second Trump administration has prohibited CBDCs in the United States. How these international developments affect Japan’s CBDC debate will be important to watch.

China had long led CBDC exploration. The People’s Bank of China (PBOC) established a digital yuan research team in 2014 and created a Digital Currency Research Institute in Shenzhen in 2017. Pilot programs began in Shenzhen, Suzhou and other areas in 2020, followed by trials in major cities including Beijing and Xi’an. Further testing was conducted during the Beijing Winter Olympics in February 2022. The system was designed as a two-tier model involving designated financial institutions. On anonymity, China adopted the concept of “managed anonymity,” which in practice likely meant that transaction information would be monitored according to transaction size.

China’s early CBDC efforts likely reflected awareness of the risks posed by the dollar-centered international financial system, as well as the potential use of the digital yuan in regional trade. The announcement of Facebook’s Libra initiative in 2019, later renamed Diem, may also have heightened Chinese fears that U.S. private platforms could dominate global digital currency. Yet China’s biggest obstacle was that convenient private payment systems, Alipay and WeChat Pay, were already widely used. For ordinary users, there was little incentive to purchase and use the digital yuan unless it was distributed free of charge during pilot programs.

In December 2025, the PBOC declared that the digital yuan would be changed from “digital cash” to “digital deposits.” In January 2026, it implemented an action plan to strengthen the digital yuan management service system and related financial infrastructure. The plan provided that the digital yuan would be converted from a central bank liability to a commercial bank liability, covered by deposit insurance, incorporated into the reserve requirement framework and made interest-bearing, with interest of 0.05 percent from January 1, 2026.

The shift to commercial bank liabilities is striking. Although the PBOC will continue to set standards and build infrastructure, the digital yuan can no longer be called a CBDC if it is not a central bank liability. Interest payments may have been introduced because, once no longer a CBDC, concerns over shifts from private deposits into risk-free central bank liabilities no longer apply. There was also a practical need to attract users away from Alipay and WeChat Pay.

3.5 The CBDC Debate in the United States

In the United States, the Biden administration issued an executive order in March 2022 on the responsible development of digital assets, calling for CBDC research and international cooperation while addressing investor protection and financial risks. Although the Biden administration did not decide to issue a CBDC, it was open to further study. It was cautious, however, toward crypto assets. Gary Gensler, then chair of the Securities and Exchange Commission (SEC), took a strict stance. In June 2023, the SEC rejected an application for a Bitcoin exchange-traded fund, though that decision was later overturned by a federal appeals court. Bitcoin ETFs were approved in January 2024 and Ethereum ETFs in July 2024. This episode reflected the emergence of partisan conflict over digital currencies: in the absence of congressional legislation banning crypto assets, an administrative restriction by the SEC was overturned by the judiciary.

The second Trump administration reversed course. In January 2025, immediately after taking office, it issued an executive order titled “Strengthening American Leadership in Digital Financial Technology.” Trump also nominated Paul Atkins, who was favorable toward crypto assets, to replace Gensler as SEC chair. The executive order promoted dollar-denominated stablecoins and clearly rejected CBDCs. In March 2025, the administration issued another executive order establishing a Strategic Bitcoin Reserve and a United States Digital Asset Stockpile, indicating that crypto assets acquired by the federal government through litigation and other means would be held as national assets.

After gaining control of both chambers of Congress in the November 2024 elections, Republicans advanced digital currency legislation. During “Crypto Week” in July 2025, the House considered three bills: the GENIUS Act on stablecoins, the CLARITY Act on crypto assets and the Anti-CBDC Surveillance State Act. All three passed the House. The GENIUS Act later passed the Senate and became law. The other two bills await Senate approval.

The CLARITY Act seeks to clarify the legal framework for crypto assets, classifying assets such as Bitcoin as “digital commodities” under the jurisdiction of the Commodity Futures Trading Commission, while securities-like tokens fall under SEC jurisdiction.

The Anti-CBDC Surveillance State Act would prohibit the Federal Reserve from directly providing financial services or accounts to individuals or issuing a CBDC; indirectly issuing a CBDC through financial institutions or intermediaries; testing, researching, developing, creating or implementing a CBDC; and using a CBDC to conduct monetary policy. The bill reflects a strong economic philosophy that central banks should not assume a central role in the economy and that CBDCs could lead to a surveillance state.

3.6 CBDCs in the EU and UK

In Europe, the European Commission published a draft EU regulation on the digital euro in June 2023. A revised proposal was submitted to the European Parliament in November 2025, with negotiations under way toward final agreement with the Council. Legislation is targeted for 2026. The European Central Bank (ECB) completed the preparation phase for the digital euro in October 2025 and moved to the next phase. Assuming the legislation passes in 2026, the ECB aims to conduct pilot projects in the second half of 2027 and issue the digital euro in 2029.

In the United Kingdom, the Bank of England and HM Treasury began public consultation on the digital pound in February 2023. In January 2024, they published a report setting out design principles and next steps based on public comments. In January 2025, they published a progress report on the design phase and a framework for the digital pound blueprint, followed by a further update in October 2025.

3.7 Stablecoins

Crypto assets are volatile and may function as speculative assets, but they lack stability as tools for remittances or payments. CBDCs could serve effectively as money for payments and settlement, but they raise issues about the impact of risk-free central bank liabilities on private financial systems, as well as concerns over state access to individual transaction data.

In this context, stablecoins have attracted attention as privately issued digital currencies that can maintain stable value relative to fiat currencies or other assets.

Stablecoins can be backed in four ways. First, fiat-collateralized stablecoins are backed by legal tender such as dollars or yen, or by safe assets such as government bonds. Second, crypto-collateralized stablecoins are backed by crypto assets, though their stability can be undermined if the underlying crypto assets fluctuate. Third, commodity-backed stablecoins are backed by commodities such as gold. Finally, algorithmic stablecoins use algorithms to adjust supply and demand, though they may fail if changes in demand exceed acceptable ranges.

There have already been failures. TerraUSD, a stablecoin backed by the crypto asset Luna, collapsed in May 2022 after Luna’s value plunged. The incident increased calls for stronger regulation and highlighted the need to carefully assess whether a stablecoin is truly “stable”.

3.8 Stablecoin regulation and developments in Japan

Japan has developed a legal framework that distinguishes narrowly defined stablecoins from crypto assets. Under the 2022 amendment to the Payment Services Act, instruments issued at a price linked to legal tender and redeemable at the same value are defined as “electronic payment instruments” and regulated accordingly. Algorithmic and crypto-asset-type stablecoins are regulated as crypto assets under the Financial Instruments and Exchange Act.

Stablecoins defined as electronic payment instruments under the Payment Services Act are generally expected to be denominated in currency, such as yen, and transferred through electronic information processing systems such as blockchain. Interest payments on stablecoins are not permitted. Issuers must segregate assets and disclose information quarterly.

On August 18, 2025, the startup JPYC Inc. became the first company in Japan to obtain registration as a funds transfer service provider. On October 27, it issued JPYC, a yen-denominated stablecoin. JPYC explains that its token is an electronic payment instrument under the Payment Services Act and has the following features: one-to-one exchange with the yen; instant sending and receiving while maintaining yen-denominated value; low-cost, high-speed on-chain transfers using blockchain; and reserve assets fully backed by yen deposits and government bonds equal to at least 100 percent of issuance.

JPYC aims to support new use cases as open financial infrastructure, including retail and e-commerce payments, business-to-business settlement, Web3 wallets, corporate accounting and SaaS, and creator support. It has stated its goal of reaching 10 trillion yen in issuance within three years. As a Type II funds transfer service provider, JPYC is subject to a 1 million yen limit per transfer, but it is expected to target concrete payment and remittance needs through low costs. Because stablecoins do not pay interest, earnings from deposits and government bonds held as reserves become JPYC’s gross profit. Scale will therefore be critical, and reaching the 10 trillion yen target efficiently will be central to its business strategy.

Japan’s three megabanks are also exploring stablecoin issuance. MUFG Bank, Mizuho Bank, Sumitomo Mitsui Banking Corporation, Mitsubishi UFJ Trust and Banking, and Progmat applied to the Financial Services Agency’s FinTech Proof-of-Concept Hub and were selected in November 2025. The project will test whether trust beneficiary rights-type stablecoins can be used for cross-border settlement between Mitsubishi Corporation’s Japanese and overseas entities. From the megabanks’ perspective, this may reduce traditional remittance fee income. Yet if they do not transform, digital remittance providers may take this business. For Mitsubishi UFJ Trust and Banking and Progmat, pioneering this structure may open new business opportunities.

3.9 Stablecoin regulation and developments in the United States

The U.S. regulatory environment changed dramatically with the second Trump administration. The administration moved to prohibit CBDCs while supporting stablecoins through the GENIUS Act, enacted in July 2025. Trump had repeatedly pledged to make the United States the “capital of crypto.” This shift from his more negative stance during his first term has fueled claims that donations from the crypto industry influenced policy. The issuance of Trump Coin, Melania Coin and the family-linked USD1 stablecoin has also raised criticism that promoting crypto and stablecoins serves the financial interests of Trump and his family.

Such concerns are not implausible, but other explanations also matter. CBDCs evoke fears of central bank control and state surveillance, making them poorly aligned with libertarian and some MAGA views. Private-sector crypto assets and stablecoins are more compatible with Republican policy preferences and constituencies.

Another factor is the strengthening of dollar hegemony. Although the dollar remains dominant, its share of global reserves has fallen from above 70 percent in the past to below 60 percent recently. As China grows in economic, military and technological power, arguments for reinforcing the dollar’s reserve currency status are politically persuasive.

Sen. Bill Hagerty of Tennessee, a former U.S. ambassador to Japan and a sponsor of the GENIUS Act, stated that the legislation would entrench dollar dominance, protect consumers, increase demand for U.S. Treasuries and ensure that innovation in digital assets remains in U.S. hands rather than those of adversaries. Trump himself, when signing the law on July 18, 2025, said that it would establish a clear and simple regulatory framework for dollar-backed stablecoins and protect the dollar’s reserve currency status, adding that losing that status would be equivalent to losing a world war.

The GENIUS Act covers payment stablecoins, excluding deposit tokens and electronic money. It places payment stablecoins and their issuers under either the Office of the Comptroller of the Currency or state jurisdiction. Issuers with more than $10 billion outstanding fall under federal OCC supervision; those below that threshold fall under state supervision. Issuers must hold reserves equal to or greater than outstanding issuance so that they can meet redemption requests at any time. Eligible reserves include U.S. currency, insured deposits, short-term U.S. Treasuries of three months or less and money market funds. Issuers must disclose reserve composition monthly on their websites, and interest payments to holders are prohibited.

Foreign payment stablecoin issuers may also issue and circulate stablecoins in the United States if several conditions are met: they must be regulated and supervised by a foreign authority with standards equivalent to those of the United States; register as required under the GENIUS Act; hold sufficient reserves at U.S. financial institutions unless mutual recognition applies; and be based in a jurisdiction that is not subject to comprehensive U.S. economic sanctions or designated as a money-laundering concern.

The U.S. stablecoin market is estimated at around $250 billion and is dominated by USDT, issued by Tether, and USDC, issued by Circle. Tether was founded in Hong Kong but moved its base to El Salvador in 2025. Circle has a robust compliance system and holds reserves such as U.S. Treasuries equivalent to USDC issuance, making it likely to qualify under the GENIUS Act. By contrast, Tether may face difficulties because USDT reserves reportedly include Bitcoin and loans. Tether has indicated that it will issue a new GENIUS-compliant “USA Tether.”

Looking ahead, the retail market will depend on whether retailers adopt stablecoins. Credit card payments entail fees of 2 to 3 percent, while stablecoin payments are expected to be far cheaper. If retailers actively adopt stablecoins, use cases could expand significantly. Amazon and Walmart are reportedly considering issuing their own stablecoins. Visa and Mastercard have also begun exploring stablecoin support. The impact of major retailers’ stablecoin initiatives deserves close attention.

Outside of Japan and the United States, Europe implemented the Markets in Crypto-Assets regulation act, or MiCA, in 2024, while Hong Kong published regulations in August 2025.

3.10 Geoeconomic implications of the rise of digital currencies

As discussed above, new digital currencies such as crypto assets, CBDCs and stablecoins are beginning to affect the nature of money.

Money is generally expected to perform three functions: a unit of account, a medium of exchange and a store of value. Crypto assets are often judged inadequate as a store of value because of their volatility. CBDCs, as central bank liabilities and legal tender, appear to satisfy these functions, yet they raise concerns about their impact on the existing credit-creation system based on private bank deposits and fears that central banks and authorities could monitor all corporate and individual economic activity. Stablecoins also raise concerns, including doubts over whether all stablecoins will preserve par value and whether a loss of confidence could trigger fire sales of reserve assets such as government bonds.

None of these digital currencies is guaranteed to succeed. Nevertheless, they are being explored at multiple levels because they promise more efficient and lower-cost payment and remittance systems. Distributed ledger technology also enables programmable money, allowing transfers or settlement to occur automatically when predetermined conditions are met, potentially improving efficiency and productivity.

At the same time, there is an underlying concern that if such convenient currencies are realized in another country’s currency, international use of one’s own reserve currency could shrink and monetary hegemony could erode.

As discussed in Part I, if reserve currency status leads to an overvalued exchange rate and weakens manufacturing competitiveness, losing reserve status might appear beneficial. Yet even those who emphasize the burden of reserve urrency status do not seek to give up low-cost foreign borrowing, the “exorbitant privilege,” or the ability to use finance and currency as geoeconomic instruments to compel other states.

The competition over digital currencies is therefore not merely an economic issue. Its impact on the position of national currencies is a central question of geoeconomics.

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Disclaimer: The views expressed in this IOG Commentary do not necessarily reflect those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.