Mechanisms of Money Creation in the Digital Economy: Endogenous Monetary Theory and Theoretical Analysis of Digital Currency Systems
Gunay Musayeva 
Abstract. The rapid development of cryptocurrencies and Central Bank Digital Currencies has revived debates concerning the mechanisms of money issuance and the relevance of traditional monetary theories. This study examines money creation in the digital age through the perspectives of Endogenous Money Theory, the Quantity Theory of Money, and emerging digital currency systems. The findings indicate that while commercial bank lending remains the primary mechanism of money creation, digital currencies have introduced additional channels that operate alongside the traditional banking system. To explain this transformation, the study proposes a Three-Tier Model of Money Creation consisting of sovereign money, credit-based money, and decentralized digital money. The analysis suggests that future monetary systems are likely to evolve toward a hybrid architecture in which Central Bank Digital Currencies, cryptocurrencies, commercial bank money, and central bank money coexist. The study contributes to the literature by extending Endogenous Money Theory to digital currency environments and providing a broader theoretical framework for understanding contemporary money creation mechanisms.
Keywords: endogenous money theory; digital currencies; central bank digital currency; cryptocurrencies; monetary sovereignty; quantity theory of money