Could IMF issue a digital global reserve currency?
Recently, a Washington- based Institute of International Finance reported that the World’s debt has reached a humongous $244 trillion, which is more than three times the size of the global economy. Do you remember the financial crisis of 2008? Were there any signs?
Last year, global government debt exceeded $65 trillion, up from $37 trillion ten years ago.
It is pretty obvious for many, that the World is at the tipping point and major changes are taking place. The central bankers, who created the current fiat money system that is backed by exponentially increasing debt, know the cycle of the currency issuance very well: one always has to repay more than he has borrowed. The World’s most popular currency, the US dollar, is backed by debt that is increasing in astounding volumes. This cannot be sustained and everyone understands that. How will this be disentangled and eventually sorted?
The quantitative easing cannot last forever- increments involved already don’t manage to catch up. The US dollar is backed by difficult- to- grasp amount of debt. The Euro, a currency that was created to enforce Europe’s centralisation of power plan, is showing clear signs of weaknesses, as are the banks of the continent. Not to mention that already before the adoption of the Euro, the economists warned that a single currency couldn’t work without a single fiscal policy.
An important view about the global currency situation is the one of China, which is an extremely important participant and leader of the global economy. The Chinese want their say in the international payments system and are not happy with the US dollar domination.
In 2009, when the debt bubble exploded, a communiqué issued by the G20 leaders announced that G20 has agreed to support a general Special Drawing Rights (SDR) allocation, which will inject $250 billion into the World economy and increase global liquidity, therefore ‘moving a world a step closer to a global currency’.
When leaders of the globe discussed whether the World needs a new banking watchdog, the Bank of International Settlements (BIS) was suggested as the most suitable candidate.
If we take all factors mentioned above into consideration together with the fact that the Chinese have pushed for the SDRs to go digital and that that the IMF’s Christine Lagarde said that SDRs could get a boost from the growth of digital currencies and did not dismiss the idea that the SDRs could supplant the US dollar and the Euro, then we are potentially looking at the future which is an international monetary and settlements system fuelled by the digital SDRs.
In other words, the World’s reserve currency might become the digital Special Drawing Rights- a basket of leading global currencies, with the aim of other currencies to be backed by SDRs. The digital-SDR-based system, the international settlements system, powered by the distributed ledger technology (DLT), would make the existing financial settlements structure a history.
With the application of DLT to manage global reserve currency, the construction and functioning of the basket can provide complete transparency, providing more efficient liquidity monitoring. Other benefits would potentially be an increased speed of cross- border transactions, reduced settlement risks for the central and commercial banks and practically no foreign exchange risk due to currencies being pegged to a basket of the currencies of key global economies.
Make no mistake, that although regulators and bankers communicate their sceptical view towards cryptocurrencies, Bitcoin and blockchain, the technology behind them- the distributed ledger technology- is being very much researched by financial institutions and governing bodies. The International Monetary Fund, the Bank of International Settlements, the European Central Bank and global central banks have all been conducting research, setting up task forces and initiating hackatons to explore the distributed ledger technology. Organisations responsible for international payments and settlements system, such as SWIFT, have also been long developing proof of concepts that utilise the DLT.
The current global currency system is only a little more than forty years old and there might be new horizons for us all ahead. Technology behind bitcoin has already shown how it can make the cross-border settlements much faster, record keeping more efficient, monitoring more easy and accessible.
Will the dollar be replaced as the global currency? What role do you think Facebook’s Libra will play in our understanding of international currency?
But, about Libra- in another blog.
Thank you for reading,
AGNE Q
