CIGI Papers No. 363 — October 2026
Monetary Sovereignty in an Age of Digital Money Timothy Lane
CIGI Papers No. 363 — October 2026
Monetary Sovereignty in an Age of Digital Money Timothy Lane
About CIGI
Credits
The Centre for International Governance Innovation (CIGI) is an independent, non-partisan think tank whose peer-reviewed research and trusted analysis influence policy makers to innovate. Our global network of multidisciplinary researchers and strategic partnerships provide policy solutions for the digital era with one goal: to improve people’s lives everywhere. Headquartered in Waterloo, Canada, CIGI has received support from the Government of Canada, the Government of Ontario and founder Jim Balsillie.
Research Director, Digital Economy Odun Olowookere
À propos du CIGI Le Centre pour l’innovation dans la gouvernance internationale (CIGI) est un groupe de réflexion indépendant et non partisan dont les recherches évaluées par des pairs et les analyses fiables incitent les décideurs à innover. Grâce à son réseau mondial de chercheurs pluridisciplinaires et de partenariats stratégiques, le CIGI offre des solutions politiques adaptées à l’ère numérique dans le seul but d’améliorer la vie des gens du monde entier. Le CIGI, dont le siège se trouve à Waterloo, au Canada, bénéficie du soutien du gouvernement du Canada, du gouvernement de l’Ontario et de son fondateur, Jim Balsillie.
Human Analysis Standard
This publication’s analysis was developed and approved by the named human authors under documented review controls; AI assistance was judicious, disclosed and verified.
Copyright © 2026 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Board of Directors. For publications enquiries, please contact publications@cigionline.org.
The text of this work is licensed under CC BY 4.0. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/. For reuse or distribution, please include this copyright notice. This work may contain content (including but not limited to graphics, charts and photographs) used or reproduced under licence or with permission from third parties. Permission to reproduce this content must be obtained from third parties directly.
Centre for International Governance Innovation and CIGI are registered trademarks. 67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org
Director, Programs Dianna English Program Manager Morgan Fox Publications Editor Christine Robertson Publications Editor Susan Bubak Graphic Designer Ivy Egamino
Table of Contents vi
About the Author
1
Introduction
1
The Basis of Monetary Sovereignty
2
The Exercise of Monetary Sovereignty
4
Dollarization
4
The Rise of Stablecoins
5
Stablecoins and Monetary Sovereignty
7
Implications for CBDC
8
Maintaining Monetary Sovereignty
9
Works Cited
About the Author Timothy (Tim) Lane is a senior fellow at CIGI and a former deputy governor of the Bank of Canada (BoC) from 2009 through 2022. He shared responsibility for monetary policy and undertook a series of other responsibilities covering all main areas of central bank policy making. He led the BoC’s work on central bank digital currency and payments modernization, and chaired the Financial Stability Board’s international working group on stablecoin regulation. Previously, he led the BoC’s international work, serving as G7 and G20 Deputy. Before joining the BoC, Tim served for 20 years at the International Monetary Fund (IMF), where he worked on a range of issues concerning advanced and emerging market economies. He has published research on monetary policy and on a variety of other topics related to economic and financial policy. He was also a visiting fellow at the University of Oxford. Prior to his work at the IMF, Tim served as assistant professor of economics at Michigan State University and at the University of Iowa. He received a B.A. from Carleton University in Ottawa and an M.A. and a Ph.D. from the University of Western Ontario in London.
vi
CIGI Papers No. 363 — October 2026 • Timothy Lane
Introduction Monetary sovereignty — the sovereign power to decide what form of money will be used and how its value is to be determined — is becoming increasingly relevant amid rapid technological and financial innovation as well as geopolitical turmoil. This is particularly so as the emergence of new forms of money and payment systems enabled by distributed ledger technology (DLT) could undermine traditional fiat currencies. The original libertarian vision for cryptocurrencies was to take money out of the realm of the sovereign. However, as the limitations of bitcoin and other cryptocurrencies as a means of payment became increasingly evident, attention has turned to other forms of digital money linked to fiat currencies, notably stablecoins and central bank digital currency (CBDC). Stablecoins derive the claim to stability of purchasing power from their link to fiat currency, and CBDC is itself a form of fiat currency. But a key attribute of such fiat-linked tokenized currencies is that they can be used across borders — and, indeed, this is currently their most promising use case. The digital economy can affect monetary sovereignty in several ways. First, the role of money in binding together a national economy is related to the singleness of money — the interchangeability of different forms of money — and that could be undermined by widespread use of stablecoins. Second, the monetary transmission mechanism, essential for maintaining price stability in domestic currency, could be undermined if stablecoins weaken the link between money and credit. Third, seigniorage can be transferred to stablecoin issuers, lessening central banks’ financial independence. A fourth set of issues is related to the fact that the most widely used stablecoins are linked to the US dollar, which inevitably raises the issue of monetary sovereignty in every jurisdiction outside the United States. These jurisdictions must thus consider the potential for wider use of US dollar stablecoins and decide whether the implications for monetary sovereignty are acceptable and, if not, what to do about them. This has been a prominent focus of discussions in Europe about the regulation of digital assets and the possible launch of a digital euro, as well as CBDC more generally (see, for example, Ahnert et al. 2024; Brunnermeier, James
and Landau 2021). It is also an increasingly important topic for Canada, given its close linkages with the US financial system and economy. This paper will first discuss some key aspects of monetary sovereignty, including the basis for its legitimacy and the capabilities required to exercise it. It goes on to discuss its role in national economic management, including the singleness of money and the considerations for choice of a national currency regime. Next, it examines how monetary sovereignty could be undermined through the spread of digital assets, especially stablecoins, notably through their implications for the singleness of money and the monetary transmission mechanism and as a potential channel of dollarization. It discusses how some similar considerations could be relevant to the use of a CBDC. Finally, it outlines some steps that countries can take to maintain their monetary sovereignty.1
The Basis of Monetary Sovereignty Monetary sovereignty is the power to choose the monetary regime: namely, the considerations of what money consists of and how its value is to be determined. Given the central role money plays in a national economy, it has been a core element of modern political sovereignty. Political scientists have thus considered monetary sovereignty and its limitations (see, for example, Murau and van ‘t Klooster 2022), but it is also important to consider this subject from the perspective of economic and financial policy.2 An important rationale for monetary sovereignty is the role that money can play in binding together a national economy. In this regard, money has powerful network effects that arguably make the establishment of a monetary system a public
1
The spread of digital assets involves many other issues, including those related to data privacy, competition and financial stability. This paper will set these issues aside, except to the extent that they have a bearing on monetary matters.
2
The concept of monetary sovereignty has also been important in heterodox monetary approaches such as modern monetary theory, which are outside the scope of the present paper. See, for instance, Mathieu (2025).
Monetary Sovereignty in an Age of Digital Money
1
good. This is related, in part, to the role of money as a unit of account: when the public quotes prices in a domestic currency, that provides a common framework for measuring value akin to a system of weights and measures. Money’s unifying role depends on its singleness: the ability to exchange different forms of money — such as deposits of different banks — so that they are generally accepted as means of payment to all (Garratt and Shin 2023). Maintaining this aspect of the monetary system involves not just money used at the retail level but also the soundness of the financial system and payments infrastructure that back it up. If the singleness of money is not maintained, the result is Gresham’s law: firms and households seek to make payment in lower-quality money and conserve money that is of higher quality. The existence of a unified national monetary system underpins the authorities’ ability to maintain a stable economy and financial system. The central bank can influence monetary conditions through its policy actions — notably by controlling the availability of reserve money in domestic currency, which is the final means of settlement. A central bank’s power to emit reserve money in unlimited quantities also underpins valuable tools to maintain financial stability, notably through its ability to provide market-wide liquidity and act as a lender of last resort in periods of financial stress. Central banks or other bank regulators are also charged with the safety and soundness of the banking system, an essential element in ensuring that deposit money can be redeemed for cash. Seigniorage was originally one of the main motivations for sovereigns to establish control over money. Money creation creates revenues via central banks’ issuance of non-interest-bearing banknotes, as well as the requirement that bank deposits be backed by non-interest-bearing reserves. Seigniorage has become less important over time with diminishing use of cash as well as the payment of interest on bank reserves. Moreover, the amount of revenue derived from seigniorage depends on decisions beyond the authorities’ control, notably the public’s decisions on the share of money they choose to hold as banknotes and the financial institutions’ decisions on holding excess reserves. But despite the diminishing revenue from seigniorage, it is an important pillar of central bank independence, enabling the central bank’s activities to be financed (and
2
CIGI Papers No. 363 — October 2026 • Timothy Lane
a surplus remitted to the government) without reliance on regular budgetary allocations. In this context, many countries establish key elements of monetary sovereignty in their constitutions and other laws, underpinning their legitimacy. Many countries’ constitutions give the national government the power to regulate money, currency and banking. These powers are the basis of laws establishing central banks and supporting their independence. Another is the power to regulate banks whose liabilities are widely used as means of payment. In a number of cases, this power is shared with subnational governments, which regulate some financial institutions such as credit unions whose liabilities may be interchangeable with bank money. In addition, legal tender laws establish the obligation to accept certain monetary instruments in payment of debt. A national government’s power to determine what form of money will be used is contingent on the public’s choices among competing monetary instruments. If the public chooses to use and accept money that is different from what the government had in mind, that will qualify the sovereign determination of the monetary regime: in effect, the exercise of monetary sovereignty is reliant on its de facto legitimacy.
The Exercise of Monetary Sovereignty Monetary sovereignty does not mean that the sovereign issues or controls all the money. Historically, the choice of monetary regime often meant defining a commodity on which money was based, such as gold or silver, and standardizing the monetary unit. The actual supply of money in circulation then depended on mining activity, as well as exports and imports of the monetary commodity and the banking system that built the supply of deposit money on that base. Similarly, under the Bretton Woods system, currencies other than the US dollar were pegged against the dollar and backed by central banks’ holdings of US dollar reserves. Modern monetary systems — even prior to the advent of digital currencies — typically involve
a mix of public and private money, with a large majority of money consisting of deposits at commercial banks so that important elements of monetary sovereignty are delegated to the private sector. The sovereign’s role in these monetary arrangements is in creating the legal framework for the whole system; establishing reserve money issued by the central bank as the final means of settlement; and maintaining a framework of regulation and policy to underpin the public’s right to redeem bank deposits for publicly issued money in the form of cash. Banks are typically heavily regulated, in part, because of their centrality to the monetary system; historically, banks issued banknotes that were an important means of payment, whereas currently, banks are typically central to the electronic transfer of payments that are the key means of payment in modern economies. The exercise of monetary sovereignty is conditional on various aspects of the government’s capacity. This includes its ability to execute monetary policy and establish a credible monetary policy framework, which, in turn, depends on the central bank’s legal authority, governance and administrative capacity. It also depends on the markets in which monetary operations are conducted; the financial system through which these operations are transmitted to financial conditions; and the foreign exchange market in which the currency’s external value is determined. Clearly, different countries have made different choices on how to exercise their monetary sovereignty. Many have chosen to maintain their own currencies and manage their monetary policies to maintain low and stable domestic inflation, while allowing their currencies’ external value to be determined in the foreign exchange market. Others, such as the members of the euro area, have chosen to pool their sovereignty by adopting a common currency. Yet others choose to peg, or informally stabilize, their currency’s value to another country’s, often maintaining some restrictions on capital movements in order to maintain some freedom of manoeuvre for domestic policies. While all of these choices are valid depending on a country’s circumstances, they should be made deliberately with regard to their potential benefits and risks to the country.
McKinnon 1963). A key insight of this literature is that the choice of regime depends on the nature of the shocks it is facing and the other mechanisms available to counter or adapt to those shocks. Countries facing idiosyncratic shocks may choose to maintain a national currency and flexible exchange rate. Exchange rate adjustments can act as a shock absorber, in many cases providing a smoother alternative to adjustments to all prices and incomes in the economy. There are, of course, other legitimate reasons for limiting exchange rate flexibility and thereby, in part, delegating monetary policy to an anchor country. Exchange rate stability can reduce fluctuations in domestic inflation stemming from exchange rate movements. There are also financial stability arguments for stabilizing exchange rates: exchange rate movements can amplify other financial shocks, especially in the presence of foreign currency debt. These reasons can be particularly relevant for countries whose currencies are subject to fluctuations unrelated to underlying economic conditions, such as those that are not traded in a large and liquid market. Another rationale for countries’ choosing a pegged exchange rate is that they are unable to maintain a credible and stable monetary regime. This has sometimes been the case for countries with a recent history of extreme inflation, such that an exchange rate peg can be a tool for rebuilding credibility. This was typically the rationale for heterodox stabilization policies adopted in Latin America and elsewhere in the 1990s. In some cases, it involved establishing a currency board tying issuance of their own currency to holdings of a reserve currency. The aim is, in effect, to borrow credibility from the reserve currency central bank. An extreme version of this is full dollarization, where a country adopts the US dollar or another currency as its own. However, anchoring on or adopting another country’s money also means importing policy and other shocks from that anchor country. For example, many advanced economies imported inflation from the United States during the 1970s, when monetary policy accommodated the fiscal expansion associated with domestic programs and the Vietnam War. Another example is the role of US monetary policy in the run-up to the Mexican peso crisis of 1995.
The choice of monetary regime is grounded in the literature on exchange rate regimes and optimal currency areas (Mundell 1961;
Monetary Sovereignty in an Age of Digital Money
3
Dollarization So far, this discussion has been about deliberate policies to limit the independent exercise of monetary sovereignty by pegging one’s currency to another country’s or even adopting another country’s currency for domestic use. Similar considerations are relevant to the phenomenon of dollarization, whereby a foreign currency comes into widespread domestic use. Dollarization has been particularly important in some emerging market and developing countries, especially in Latin America. It has usually been driven by weak confidence in the domestic monetary regime, particularly in countries with recent histories of high inflation and weak institutions. As dollarization advances, the foreign currency (typically the US dollar) becomes widely used as a unit of account for pricing domestic goods and services, and domestic lending is often in dollars. In the context of high domestic inflation, dollarization does present certain benefits to domestic households and firms, which prefer the greater stability of using foreign currency. But dollarization can also weaken the central bank’s control of the domestic price level, thus augmenting the instability from which dollarization was intended to serve as a protection. This is partly because the monetary policy transmission mechanism is weakened when significant elements of monetary conditions are driven by policies in the anchor country. Also, as the public becomes increasingly focused on prices denominated in foreign currency, expectations are not anchored in a way that supports the maintenance of domestic price stability. Dollarization can then become a vicious circle. The challenges of maintaining macroeconomic and financial stability in dollarized economies are reflected in empirical evidence that financially dollarized economies display a more unstable demand for money; a greater propensity to suffer banking crises after a depreciation of the local currency; and a slower and more volatile output growth (see, for example, Levy Yeyati and Sturzenegger 2002). This is, in part, because dollarization is associated with currency mismatches for households, firms and/or financial institutions, which have been at the heart of the emerging market crises of the 1990s and 2000s, resulting in spiralling financial system stress and a collapse in domestic demand (see, for example, Ghosh et al. 2002). The
4
CIGI Papers No. 363 — October 2026 • Timothy Lane
phenomenon of dollarization is an illustration of the need for monetary sovereignty to have de facto legitimacy: even though a government has the legal power to maintain a national currency, the exercise of that power is conditional on the public’s acceptance of using that currency. This paper has thus far reviewed some general considerations related to the exercise of monetary sovereignty. It will now examine how similar considerations could arise with the spread of digital currencies.
The Rise of Stablecoins Digital assets could potentially erode monetary sovereignty. Diminishing the role of the state in creating and regulating the use of money was originally an intended result of the development of cryptocurrencies, creating the foundation for a more decentralized monetary system. The term “mining” was an explicit reference to gold and other commodity monies, suggesting that, with the right incentive mechanisms in place, the private sector could stabilize the purchasing power of money without government involvement. Experience thus far with cryptocurrencies has made it evident that they cannot deliver stable purchasing power. Their limited supply, together with demand that fluctuates with market sentiment, has resulted in wide fluctuations in cryptocurrencies’ price. While these fluctuations have enhanced their popularity for speculative purposes, they also make cryptocurrencies unsuitable for use as a means of payment, a unit of account or a unit for denominating borrowing and lending. Attention has thus turned to stablecoins, whose value is pegged in relation to fiat currency, predominantly the US dollar — in effect borrowing credibility from fiat money. If the peg is sufficiently reliable, it could deliver the stability of purchasing power that cryptocurrencies lack, making them a more plausible candidate as a form of money. Stablecoins have existed since 2019. So far, they have largely been used for purposes related to crypto-assets, including as a conduit for funds in and out of cryptocurrencies and to bridge different
digital platforms. Their greater degree of privacy relative to bank-based methods of payment has also made them attractive for various illicit purposes such as money laundering, tax evasion and evasion of sanctions (Financial Action Task Force 2025). Recently, however, they have begun to be used more widely for other purposes, notably for the payment of cross-border remittances. Despite this growth, a recent study estimated that less than one percent of stablecoins were used for payments (Noll 2026; Balutel, Henry and Rusu 2023). Some recent and ongoing developments favour further spread of the use of stablecoins. One is the progress that has been made globally to regulate their issuance, including by establishing requirements for stablecoins’ reserve backing, disclosure, governance and management of operational and financial risk. In the United States, the GENIUS Act3 establishes a framework for stablecoin regulation, where previously a lack of clarity about how stablecoins would be regulated and by what agency had inhibited both their issuance and adoption. In the European Union, the Markets in Crypto-Assets Regulation directive also establishes a framework for the industry. Another factor is the development of projects to use stablecoins as part of a broader payments infrastructure — for example, to facilitate crossborder payments. Some of these projects involve experiments with tokenization of a wider set of financial assets, which open up the possibility that trading arrangements could be transformed with more transactions taking place in real time on distributed ledgers rather than through the existing configuration of exchanges, dealers, brokers, and payments and settlement systems. Advances in tokenization could increase the need for a stablecoin as a means of payment. At the retail level, the inadequacies of existing methods of cross-border payment make stablecoins a potentially attractive alternative. Cross-border use could contribute to spreading domestic use as well — for example, if households receiving remittances in the form of stablecoins find it convenient to hold those stablecoins as a store of value, or to spend them without first converting them into domestic currency.
3
So far, in countries such as Canada with low and stable domestic inflation and well-functioning domestic retail payments systems, there does not seem to be a compelling case for using stablecoins rather than bank-based methods of payment in the form of contactless credit and debit cards. A stronger argument exists for their usage in relation to cross-border payments: arguably, Canadians could increasingly use stablecoins to pay remittances to family members in other countries. This would have the advantage of avoiding the multiple levels of transactions and controls that go into foreign transactions through banks. If stablecoins came into wider use for this purpose, there could be spillovers to other uses involving payment for domestic goods and services. However, such spillovers seem more likely to be important for the countries receiving remittances; families that receive US dollar remittances would be more inclined to also try to spend in US dollars, whereas it seems less likely that individuals sending the remittances would try to get paid in US dollars. In addition, it is not clear whether the crossborder use of stablecoins would be at the retail or intermediary level: recent industry experiments have illustrated that processing international payments using US dollar stablecoins as a settlement asset is feasible, allowing the end users to each transact in their own respective currencies.
Stablecoins and Monetary Sovereignty Singleness of Money If stablecoins did come into wider domestic use, what might the implications be for monetary sovereignty? One set of issues is related to the singleness of money, which could be undermined in several ways. The value of stablecoins tends to fluctuate around that of fiat currency, with some significant departures possible particularly in times of stress. This fluctuation can be addressed, up to a point, by establishing a strong legal right to redemption at par and through strong and uniform regulation, but in practice such mechanisms are still works in progress and issuers’ reserve quality may differ. This could particularly be an issue if stablecoins regulated
Guiding and Establishing National Innovation for U.S. Stablecoins Act
Monetary Sovereignty in an Age of Digital Money
5
in different jurisdictions circulate side by side. Moreover, there is the possibility that reserves could be ring-fenced in a crisis, so that the safety of the same stablecoin could differ depending on the residency of the holder (Portes 2025).
and the sale of domestic currency assets, often in the form of repurchase agreements. These operations affect banks’ funding costs, which are then transmitted to lending rates and credit availability throughout the economy.
Another key element of the singleness of money is the tools available to authorities to maintain financial stability. This relates to the elasticity of money: in the traditional bank-based monetary system, the central bank has the ability to expand the supply of central bank money at times of financial stress to support illiquid but insolvent institutions that thus maintain convertibility among different forms of money. In contrast, in a system based on stablecoins, supply of money would have a tendency to contract during such episodes (Banerjee et al. 2025), limiting the central bank’s ability to counteract systemic stress. This is particularly the case where there is widespread use of stablecoins issued in other countries.
Up to a point, these operations would work the same way as stablecoins gain acceptance but with the resulting disintermediation of bank deposits — as an increasing share of money is backed by reserves of safe assets such as government securities rather than by credit. Such operations would have less impact on the supplydemand balance in the economy when a greater share of economic activity is conducted in foreign currency. The impetus for, and implications of, the spread of foreign-currency-denominated stablecoins become more complex when either or both central banks involved lose control of price stability. Clearly, the use of such stablecoins becomes more attractive in countries that have high and unstable inflation, such that the US dollar offers more stable purchasing power over domestic goods and services. By the same token, if the United States were to lose control of inflation, that would weigh against any use of US dollar stablecoins in other countries, even if there were a convenience or privacy value to doing so. However, widening use of US dollar stablecoins would expose residents of other countries to unstable purchasing power in the event that the Federal Reserve’s independence were seriously undermined.
Another way in which stablecoins could impair the singleness of money is the possibility of scenarios in which technology platforms issue stablecoins for use on their own platforms only, without establishing interoperability with the rest of the monetary system. There is the potential that a stablecoin providing a convenient way of transacting on a particular platform could be used to draw more and more business onto that platform and generate data that could further expand the business — with little motivation to support convertibility with other forms of money. This possibility was among the concerns arising from the 2019 launch of Libra by Facebook and its partners. If the spread of stablecoins undermines the singleness of money, that could activate a version of Gresham’s law in that less strongly backed currency would be more widely used in payments — in line with the maxim that “bad money drives out good.” This, in turn, would reward the less prudent issuers of digital money and result in undermining the quality of the monetary system. This prospect is one reason why uniform standards of stablecoin regulation are so important.
Monetary Transmission Widening use of stablecoins could also have implications for the monetary transmission mechanism — a sine qua non for the exercise of monetary sovereignty. Central bank operations typically work through short-term purchases
6
CIGI Papers No. 363 — October 2026 • Timothy Lane
Seigniorage A sizable shift into stablecoins from cash and deposits would mean a shift of seigniorage revenues from the central bank to the stablecoin issuers. Central banks currently earn seigniorage primarily on the spread between the zero rate paid on banknotes and the interest earned on their holdings of (primarily government-issued) securities. This revenue enables central banks to finance their operations (and remit any surplus) without resort to annual budget allocations by the government, thus underpinning central bank independence. If there is a sizeable enough loss of seigniorage by the public sector, other mechanisms would need to be found to ensure their financial viability so that they can continue to maintain price stability — on which the purchasing power of stablecoins also depends. Banks may also, in effect, earn a portion of seigniorage based on their central position in the monetary system, which enables them to issue
non-interest-bearing deposits that finance their holdings of interest-bearing assets. To the extent that stablecoins displace transactions deposits, that would mean a loss of such revenues. While maintaining the profitability of the banking system should not be an objective of public policy, there is the possibility that this could reach a point at which banks would become non-viable, making the national monetary system less stable. The shift of seigniorage has different implications to the extent that stablecoins are issued in another jurisdiction. In this case, the seigniorage would be transferred across national borders. If regulations in the country where the stablecoins are issued require that they be backed largely with that government’s bonds, that could create a preference for those bonds which would, in effect, transfer revenues to that foreign government.
Digital Dollarization A fourth set of issues is related to the possibility that stablecoins denominated in US dollars could become a form of dollarization. This could occur if the use cases of stablecoins evolved so that their convenience and privacy led them to be increasingly used as a means of payment despite the currency risk inherent in using a US dollar-denominated instrument. This possibility has increasing relevance as the current US administration is vocally promoting the idea that stablecoins could become a vehicle for encouraging much more widespread use of the US dollar and for creating demand for US government securities held as reserve assets. If stablecoins denominated in US dollars became a form of dollarization, it could undermine price stability in domestic currency in several ways, as was discussed in the previous section. Prices and even wages could start to be quoted in US dollars, undermining the role of domestic currency as a unit of account. At some point this could become a vicious circle: as domestic currency inflation becomes increasingly less relevant to private-sector decisions, that could make it increasingly difficult to keep inflation expectations anchored, reinforcing the motivation to transact in a foreign currency.
Implications for CBDC So far, this discussion has focused on stablecoins, which are as yet predominantly linked to the US dollar. Similar issues arise with cross-border use of CBDCs. A CBDC is another digital, and potentially tokenized, form of money, which in many ways could be similar to stablecoins. However, it would not require any backing mechanism to maintain its parity with fiat money; like cash, it would itself be a form of fiat money — a direct liability of the central bank. As such, it has been argued that a CBDC could be a tool for maintaining the singleness of money. At this point, the United States has eschewed any plan to issue a CBDC but a majority of central banks have been exploring this possibility (Illes, Kosse and Wierts 2025) and a few CBDCs have actually been launched, mainly in developing countries. On the one hand, reinforcing monetary sovereignty is one of the potential motivations for a domestic currency CBDC (Brooks 2021). It has been argued that if declining use of cash reaches a tipping point where cash is no longer widely accepted, a CBDC could constitute an equivalent digital form of fiat money that would be universally available and accepted at par as a means of final settlement (Rivadeneyra, Hendry and García 2024). It could also provide an equivalent (but potentially superior, because safer) digital alternative to stablecoins, particularly to those denominated in foreign currency. For example, the desire to maintain European sovereignty in the face of challenges from US-based methods of payment has been a major motivation for moving forward with the digital euro. In principle, a domestic currency CBDC could help preserve the singleness of money. The one major caveat is related to the issue of empirical legitimacy mentioned earlier: a CBDC could be introduced for public policy reasons but would go nowhere unless the public chooses to use it. There is also the possibility that one country’s CBDC could undermine the monetary sovereignty of other countries. The project that would probably have the greatest potential to be consequential internationally, if launched, is the digital euro. The European Central Bank (ECB) has undertaken a systematic exploration of this possibility in preparation for reaching a decision on whether to move forward. By the same token, however, the European Union’s large and diversified economy
Monetary Sovereignty in an Age of Digital Money
7
and financial system and the ECB’s commitment to price stability could make a CBDC attractive for holders outside the European Union, while its digital nature could make it convenient to access. But how much traction it would gain would depend on the development of applications and platforms that make its use convenient. In addition, current proposals for a digital euro envisage restrictions on the size of holdings and transfers, with a view to minimizing the risk of destabilizing some fragile incumbent financial institutions. It is also currently envisaged that holdings of the digital euro would be limited to EU residents. Such restrictions could have the effect of limiting use to small domestic transactions for which cash is ordinarily used, thus curtailing the potential for extensive offshore use. Pilot projects for CBDCs have also been conducted in large emerging market economies, notably China and India. These are on a relatively large scale for pilots, making CBDCs available to millions of people. But the uptake of CBDCs has been limited and largely domestic. In the case of China, the program has recently been revised to allow for the possibility of a CBDC to take the form of deposit money on which interest could be paid (Chorzempa 2026). But wider international reach of those CBDCs is likely to depend on the issuing banks’ willingness to relax controls on money flows in and out of their countries. The lack of depth and liquidity of their financial markets more generally is also likely to be an important limiting factor.
Maintaining Monetary Sovereignty The focus so far in this paper has been on why monetary sovereignty matters and how it could be challenged by the spread of stablecoins and CBDCs. This last section discusses what countries such as Canada can do to preserve their monetary sovereignty. First, the experience with dollarization suggests that the most important way of preserving monetary sovereignty is to maintain a stable domestic monetary system. Canadians have long had the option of saving and paying in US dollars but have not chosen to do so on a large scale (Murray and Powell 2002). Continuing to maintain
8
CIGI Papers No. 363 — October 2026 • Timothy Lane
the dominance of Canadian dollars within Canada requires maintaining a regime that undergirds price stability and financial stability. If this is done, it would take a substantial convenience advantage to override the currency risk inherent in using a foreign currency for transactions. In the current context, where central bank independence is under attack in the United States in the context of large and growing government debt, the table is further tilted away from widespread adoption of US dollar methods of payment, even if those offer some technological advantages (Kamin and Sobel 2024). Second, Canada must keep pace with useful innovation while modernizing regulation to maintain the safety of innovative products. Here, some particularly important elements include the regulation of stablecoins and the introduction of open banking, as well as moving forward to implement Canadian stablecoin legislation passed in March 2026. In addition, any stablecoins issued by federally and provincially regulated financial institutions should be aligned with those issued by non-bank issuers. Tokenization of bank deposits should also be regulated so that it addresses relevant risks in an equivalent way. These steps will help set the stage for safe innovation in Canada to develop products and services that meet the needs of Canadians. Another important issue is the regulation of stablecoins used in Canada but issued elsewhere, notably in the United States. Here, it will be important to develop a clear framework for assessing the equivalence of the regulation of US dollar stablecoins as a basis for mutual deference. Moreover, there should be some further thoughtful discussion of a possible CBDC and what purposes it might serve, particularly in the context of widening tokenization of financial transactions. While it is not clear whether a CBDC would be either desirable or successful, there are conditions under which it could be a bulwark for monetary sovereignty, particularly in the event that no Canadian dollarbased stablecoin comes into wide enough use to fend off growing use of US dollar-denominated stablecoins (Rivadeneyra, Hendry and García 2024). Finally, Canadian authorities should participate more actively in exploring alternative methods of cross-border payment and settlement using DLT and tokenized central bank money and other assets. The Bank of Canada was a pathbreaker in such explorations in 2017 with its Project Jasper (Chapman et al. 2017; Lau 2018), and a series of live
experiments have subsequently been undertaken by the Bank for International Settlements (BIS) Innovation Hub. The Bank of Canada’s recent announcement that it is joining the BIS’s Project Agorá, along with other advanced economy central banks and private sector financial institutions, points to the possibility of using digital technology to bypass the US-dominated monetary system. Such initiatives could help provide meaningful alternatives to stablecoins for cross-border payments, as well as preserve the monetary and financial sovereignty of middle-power countries.
Acknowledgements The author thanks two anonymous referees for thoughtful comments and suggestions. Any remaining errors are the author’s sole responsibility.
Works Cited Ahnert, Toni, Katrin Assenmacher, Peter Hoffmann, Agnese Leonello, Cyril Monnet and Davide Porcellacchia. 2024. “The Economics of Central Bank Digital Currency.” International Journal of Central Banking 20 (4): 221–74. www.ijcb.org/sites/default/files/journal/v20n4/ijcbv20n4-economics-central-bank-digital-currency.pdf. Balutel, Daniela, Christopher S. Henry and Doina Rusu. 2023. “Cryptoasset Ownership and Use in Canada: An Update for 2022.” Bank of Canada Staff Discussion Paper 2023-14. July. www.bankofcanada.ca/wpcontent/uploads/2023/07/sdp2023-14.pdf. Banerjee, Ryan Niladri, Jon Frost, Michael Chui and Jose María Vidal Pastor. 2025. “Elasticity in the monetary system.” BIS Bulletin No. 101. June 4. www.bis.org/publ/bisbull101.pdf. BIS. 2022. Project mBridge — Connecting economies through CBDC. October. Basel, Switzerland: BIS. www.bis.org/publ/othp59.pdf. Brooks, Skylar. 2021. “Revisiting the Monetary Sovereignty Rationale for CBDCs.” Bank of Canada Staff Discussion Paper 2021-17. December 17. www.bankofcanada. ca/wp-content/uploads/2021/12/sdp2021-17.pdf. Brunnermeier, Markus K., Harold James and JeanPierre Landau. 2021. “The digitalization of money.” BIS Working Papers No. 941. May. www.bis.org/publ/work941.pdf.
Chapman, James, Rodney Garratt, Scott Hendry, Andrew McCormack and Wade McMahon. 2017. “Project Jasper: Are Distributed Wholesale Payment Systems Feasible Yet?.” Bank of Canada Financial System Review. June. www.bankofcanada.ca/wp-content/ uploads/2017/05/fsr-june-2017-chapman.pdf. Chorzempa, Martin. 2026. “China gives up on statebacked digital cash: The US and Europe should take note — for different reasons.” Realtime Economics (blog), February 10. www.piie.com/blogs/realtimeeconomics/2026/china-gives-state-backeddigital-cash-us-and-europe-should-take-note. Financial Action Task Force. 2025. Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers. June. Paris, France: Financial Action Task Force. www.fatf-gafi.org/content/dam/ fatf-gafi/recommendations/2025-TargetedUpate-VA-VASPs.pdf.coredownload.pdf. Garratt, Rodney and Hyun Song Shin. 2023. “Stablecoins versus tokenised deposits: implications for the singleness of money.” BIS Bulletin No. 73. April 11. www.bis.org/publ/bisbull73.pdf. Ghosh, Atish, Timothy Lane, Marianne Schulze-Ghattas, Aleš Bulíř, Javier Hamann and Alex Mourmouras. 2002. “IMF-Supported Programs in Capital Account Crises.” International Monetary Fund Occasional Paper 210. February 6. https://doi.org/10.5089/9781589060821.084. Illes, Anamaria, Anneke Kosse and Peter Wierts. 2025. “Advancing in tandem — results of the 2024 BIS survey on central bank digital currencies and crypto.” BIS Paper No. 159. August. www.bis.org/publ/bppdf/bispap159.pdf. Kamin, Steven B. and Mark Sobel. 2024. “The big threat to dollar dominance is American dysfunction.” FT Alphaville (blog), June 10. www.ft.com/ content/293a7a58-3f14-426c-8b7f-fa0859054842. Lau, Yi Meng. 2018. Cross-border interbank payments and settlements: Emerging opportunities for digital transformation. November. Singapore: Monetary Authority of Singapore. https://ink.library.smu.edu.sg/sis_research/7562. Levy Yeyati, Eduardo and Federico Sturzenegger, eds. 2002. Dollarization: Debates and Policy Alternatives. Cambridge, MA: The MIT Press. https://doi.org/ 10.7551/mitpress/2481.001.0001.
Monetary Sovereignty in an Age of Digital Money
9
Mathieu, Alban. 2025. “Clarifying the Concepts of Monetary Sovereignty and Monetary Power: An Institutionalist Perspective.” Review of Radical Political Economics 58 (3): 409–25. https://doi.org/10.1177/04866134251345171. McKinnon, Ronald I. 1963. “Optimum Currency Areas.” American Economic Review 53 (4): 717–25. https://www.jstor.org/stable/1811021. Mundell, Robert. 1961. “A Theory of Optimum Currency Areas.” American Economic Review 51 (4): 657–65. www.aeaweb.org/aer/top20/51.4.657-665.pdf. Murau, Steffen and Jens van ’t Klooster. 2022. “Rethinking Monetary Sovereignty: The Global Credit Money System and the State.” Perspectives on Politics 21 (4): 1319–36. https://doi.org/10.1017/S153759272200127X. Murray, John and James Powell. 2002. “Is Canada Dollarized?” Bank of Canada Review. Autumn. www.bankofcanada.ca/wp-content/ uploads/2010/06/murraye.pdf. Noll, Franklin. 2026. “What Are Stablecoins Used for Today? Estimating the Distribution of Stablecoins.” Federal Reserve Bank of Kansas City Payments System Research Briefing, April 10. www.kansascityfed.org/documents/15703/ PaymentsSystemResearchBriefing26Noll0410.pdf. Portes, Richard. 2025. “Multi-issuer stablecoins: A threat to financial stability.” VoxEU, October 27. https://cepr.org/voxeu/columns/multiissuer-stablecoins-threat-financial-stability. Rivadeneyra, Francisco, Scott Hendry and Alejandro García. 2024. “The Role of Public Money in the Digital Age.” Bank of Canada Staff Discussion Paper 2024-11. July 10. www.bankofcanada.ca/ wp-content/uploads/2024/07/sdp2024-11.pdf.
10
CIGI Papers No. 363 — October 2026 • Timothy Lane
Human Analysis Standard For AI Use in Policy Research
67 Erb Street West Waterloo, ON, Canada N2L 6C2 www.cigionline.org