The emergence of digital assets will threaten the global dominance of the US dollar, but it is not easy to overthrow the current global reserve currency, the US dollar.
After the end of World War II, the Bretton Woods Agreement formally established the U.S. dollar’s unchallenged dominance in 1944. Since then, the global monetary system has been centered on the U.S. dollar. While the United States controls the world’s reserve currency, it has also enhanced the country’s already huge geopolitical influence and its ability to run huge deficits at low cost.
Today, more and more experts believe that the hegemony of the dollar may be declining. The declining share of the United States in world trade, the expansion of China’s monetary power, and the expected digitization of national currencies are all likely to erode the foundation of the existing financial order. So, what role can the future central bank digital currency and crypto assets such as Bitcoin play in shaping new international financial circulation intermediaries?
American exorbitant privilege
“Currency hegemony” refers to one of the most common terms that the United States has great influence in international trade. It first appeared in the book “Super Imperialism” published by economist Michael Hudson in 1972. Although the book has been published for nearly half a century, many of the points stated in it are still valid.
As of this year, nearly 60% of foreign exchange reserves are still denominated in U.S. dollars. In addition, in global foreign exchange transactions, apart from accounting for 88%, about 40% of world trade is denominated and settled in US dollars.
As the currency of the world’s accounting unit, the US dollar has a series of privileges, which puts the United States in a so-called privileged position. First, because it uses domestic currency to pay for imported goods, currency hegemony is not bound by the balance of payments. This means that it will not face the risk of losing its ability to pay for basic imports or regular deficit financing.
As the world’s largest debtor country, the United States has made full use of the dollar’s status. Since all parties involved in international trade—governments, companies, and banks—always need dollar liquidity, the market’s capacity for new dollar-denominated debt is almost unlimited. For decades, the United States has spent more than its own wealth capacity, thanks to the simplification of cheap international credit.
U.S. dollar as the world reserve currency
Is declining?
As the Obama-era Treasury Secretary Jacklew once warned, the centrality of the dollar in the global financial system depends on whether other countries are willing to abide by current rules.
US President Trump has increased sanctions and other financial restrictions on Iran and other countries. As the economist Jeffrey Sachs put it, this has led countries that are dissatisfied with it to speed up the de-dollarization of their economies. Sachs believes that this geopolitical change, coupled with the continuous shrinking of the US economy’s share of global GDP, may indicate that the US dollar’s status as the world’s reserve currency is declining.
M10 CEO Steve Kirsch agreed with Sachs’ assessment of the current international status of the dollar. Kirsch told Cointelegraph, “It can be said that President Trump is the biggest force pushing the rest of the world away from the dollar and seeking alternatives.”
Centralized digital alternative
One of the main reasons for the continued existence of dollar hegemony is the inherent inertia of the huge international trading system. Since all parties involved in this plan have relied on the U.S. dollar for decades, one cannot simply decide to choose another approach, especially if the U.S. dollar does not bring significant efficiency improvements compared to the old approach. However, the rise of CBDCs may pose a real threat to the status of the dollar because they can provide a faster and more convenient medium of exchange.
Some observers pointed out that if China succeeds in capitalizing on its expanding economic influence and the availability of its future digital currency infrastructure, China may be most likely to challenge the dominance of the dollar. Omri Ross, chief blockchain scientist at multi-asset trading platform eToro, commented on Cointelegraph:
“Although in the short term, the Chinese economy still lags behind the Western world in most per capita indicators, it has adopted an aggressive expansion approach in terms of physical and digital infrastructure innovation, coupled with substantial investment in emerging markets, and the upcoming’digital yuan’ ‘Will become a natural competitor of the dollar.’
Two Prime’s Fleury believes that with the rise of Chinese digital assets, two main power centers may emerge in the global monetary system, followed by other currencies: “At least, we will see a two-polar world banking system. U.S. dollar and renminbi. Euro and yen are also important.”
Another idea being considered by central bankers around the world is to establish a global public encrypted asset based on a basket of national currencies. This design was called by Mark Carney, the former governor of the Bank of England. “Synthetic hegemonic currency”.
Although at this point, the rise of CBDC seems inevitable, there are obvious restrictions on the number and types of changes that these centrally controlled assets can bring. John Deacon, head of financial services at the blockchain company Dragon, told Cointelegraph:
“The ability of the trade war and coronavirus to disrupt the status quo of the global monetary system will be limited by the current degree of localization and the need to protect the domestic banking industry. This is a non-CBDC digital currency (that is, it is not favored or not favored by a country or group). The currency affected by economic or trade policies) has opened up a niche as a store of value and a medium of exchange.”
Ido Sadeh Man, the founder of Saga Monetary Technologies, a crypto asset company, believes that no matter whether a country’s currency is paper or digital, it is still subject to the government’s national and international agendas, adding:
“Today, imagining the future global currency system feels like a fork in the road: either we continue to add technology to the defective system, or we release and experience the full capabilities of technology, redesign and strengthen the global currency model.”
Bitcoin’s challenges
While the US dollar is still the global currency hegemon, and even when another country’s currency is likely to eventually replace it, the country in charge of the world’s accounting unit can still use it to improve its status.
If international trade finds a way to turn to a politically neutral currency, then it seems more feasible to decouple monetary dominance from geopolitical power. Ross of eToro observed:
“Given that most companies tend to a stable macroeconomic environment, the motivation to settle transactions in a global neutral currency will be huge. In this case, the biggest challenge Bitcoin faces is still volatility and adoption.”
In an interview with Cointelegraph, James Wo, chairman and chief executive officer of the venture capital company Digital Finance Group, stated that he invested his funds in ether instead of bitcoin:
“I don’t think Bitcoin can replace the U.S. dollar, because an important function of the U.S. dollar is to act as a payment tool. In the short term, Bitcoin has not yet solved its scalability problem with a reliable method, so it cannot be used as a payment method. Definition of Bitcoin It’s closer to a commodity, just like gold. I think Ethereum has a chance to become a global programmable circulating asset.”
Kirsch of M10 believes that Bitcoin cannot meet the challenge because he believes that the future digital euro is most likely to become a contender for the throne: “Bitcoin is a cloud computing system. The US dollar is legal tender. If the European Central Bank (ECB) issued an electronic version Euro, and if electronic transactions are easier to achieve 24×7, then this may be a challenge to the dollar.”
Fryry told Cointelegraph that, in his opinion, Bitcoin “has almost zero chance of reaching reserve currency status.” The two main structural reasons for this situation are its volatility and the limited supply of algorithms. From the perspective of monetary policy, the global reserve currency must be flexible.
It is also possible that the emergence of many alternative U.S. dollars will lead to a multi-polar arrangement in which no currency enjoys hegemony. Encryption consultant and investor Frank Schuil pointed out: “Most people believe that the end result is a hybrid: state-based currency, decentralized crypto assets, and corporate currency.” Even considering this The potential diversity, Scheuer believes, Bitcoin is still the most likely to occupy the winning position.
This article is a translation, and the content is for information transmission and does not constitute any investment advice.
Some pictures are from the original text.
Translation: Com|Dahlen Think Tank
Proofreading: Gong Liangjun|Da Ling Think Tank
Editor: Yang Junyi|Da Ling Think Tank
Review: Amber|Dahlen Think Tank
