Global central banks are laying the foundations for a digital currency revolution: Thinking among global central bankers about how best to usher in national digital currencies has moved into higher gear over the past week, with both the Bank of International Settlements (BIS) (pdf) and the Financial Stability Board (FSB) (pdf) releasing papers on how policymakers can integrate virtual cash into the financial system. Facebook’s ambitions to launch its stablecoin, Libra, has placed central banks in a quandary about how to prevent private digital currencies from superseding government-issued monies, and how to introduce them without undermining financial stability and facilitating cross-border crime.

What are the key risks? Existing national legislation does not fully cover global stablecoins, and their widespread use risks destabilizing exchange rates and might expose financial institutions to adverse confidence effects if they are seen as a more reliable store of value than state-issued currencies, the FSB said. Meanwhile, central bank-backed currencies risk increasing the reliance on payment systems and data storage capacity beyond the control of domestic institutions, and provoking runs into central bank currency, the BIS said.

How can regulators overcome them? The FSB recommends that authorities put in place a comprehensive governance framework that entails cross-border cooperation, and ensure that stablecoin issuers include effective risk management and robust data security capabilities. It also urged further reviews of how existing regulations are being implemented, which will be completed by July 2023, as well as a review of whether the new regulations are doing enough to prevent money laundering, which will be done in December 2021.

We’re rapidly moving into an era of digital currencies: China, which is planning to be the first nation to issue a digital currency, has just begun trialling its digital yuan in Shenzhen ahead of a possible nationwide roll-out later this year. Sweden started testing its e-krona in February, Russia has announced it is considering launching a digitized ruble, and the European Central Bank is floating the idea of a digital Euro, with President Christine Lagarde saying the digital euro would supplement, not replace cash. The Central Bank of Egypt is also said to be mulling its own cryptocurrency.