Digital Currencies and Their Policy Implications for Financial Stability

Abstract

The rise of digital currencies including cryptocurrencies, stablecoins, decentralized finance (DeFi), and central bank digital currencies (CBDCs) has created opportunities and risks for financial systems. This study reviews literature published to examine how these innovations affect financial stability. Using a systematic approach, it synthesizes findings from academic and policy sources on key risk channels and policy responses. Results show that private digital assets increase volatility, contagion risks, and regulatory challenges, while CBDCs can enhance payment efficiency and monetary policy but may also cause disintermediation and new vulnerabilities. The discussion highlights three themes: risks from private digital assets, opportunities and trade-offs in CBDCs, and the need for coordinated regulation. The review concludes that digital currencies can modernize finance but require robust oversight to prevent systemic instability.