DIGITAL MONEY AND THE FINANCIAL SYSTEM: REGULATION, BENEFITS AND RISKS

Abstract

In today’s world, digital money is becoming an integral part of financial systems, and the process of its implementation is actively developing. Commercial digital currencies have long been operating in the market, with their advantages and disadvantages discussed for more than a decade. At the same time, more and more governments are considering the digitalization of national currencies, which requires in-depth research and practical testing. Although digital money offers significant benefits, its implementation comes with several challenges that require thorough analysis. The main disadvantages include: 1. Cybersecurity Risks. Digital assets are vulnerable to hacker attacks, phishing, and data breaches. Even centralized digital currencies (CBDCs), such as the e-hryvnia, may be susceptible to external attacks or internal security breaches. 2. Privacy Issues. The use of digital money may lead to excessive government control, threatening citizens’ financial anonymity. It is necessary to find a balance between security and personal data protection. 3. Cryptocurrency Volatility. If digital money is based on blockchain or cryptocurrency technologies, it may experience high volatility, making it difficult to use in everyday transactions. 4. Regulatory Uncertainty. Legislation on digital assets in many countries (including Ukraine) is still under development. Uncertainty in legal regulation may slow down the integration of digital currencies into the financial system. 5. Impact on the Banking System. If central banks actively introduce their own digital currencies, this may lead to capital outflows from traditional banks, affecting their liquidity and ability to provide loans to the economy. To address these challenges, further research is needed in the following areas: developing effective cybersecurity mechanisms to protect digital money from attacks; studying regulatory approaches and creating legal frameworks that ensure a balance between security and privacy; analyzing the economic impact of digital currencies on banks, lending, and macroeconomic stability; assessing public trust in digital money and the potential consequences of its adoption. Thus, while digital money has great potential, its implementation requires a cautious approach and further research to minimize risks and create an efficient financial system.