Three weeks back, the Bank of England Governor Mark Carney made an alarming comment on the global reserve currency, the US dollar. The economist said that the world’s reliance on the greenback “won’t hold” and a new global monetary and financial system backed by many more global currencies would replace it. Carney called the bundle a Synthetic Hegemonic Currency (SHC).
The comments sparked a fresh wave of discussions over the dollar’s inability to offer a cushion to growing macroeconomic risks. Many suggested bringing back the old Gold standard system, while others said that China’s yuan should become the ringleader of the next global reserve asset reserves pool.
Jeremy Allaire, the CEO & co-founder of Boston-based Circle, sees the emergence of fiat-backed digital currencies as a significant step towards attaining an SHC-like reserve. Speaking to CNBC, Allaire said that China is already advancing in creating a digital yuan, which would propel the currency’s use not only inside China but across international borders.
“This becomes a mechanism by which (the yuan) can be used in everyday transactions all around the world,” added Allaire. “It’s ultimately a foundation for the internationalization of the yuan.”
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Allaire also slipped into the substantial similarities China’s digital yuan shares with non-sovereign blockchain assets, such as Bitcoin and Ethereum. He said the global financial system could support a reserve pool of similarly-created digital assets intended to break the dollar hegemony. Bitcoin, being the benchmark cryptocurrency, could become a part of that basket. Excerpts:
“We are in a phase where the major central bank currencies will get expressed as cryptocurrencies. We will be able to utilize them with the same speed and efficiency as you can with other cryptocurrencies. But eventually, we believe that there will be a global unit of account that brings together difference reserve currencies. And probably, these universal baskets will include bitcoin.”
The bitcoin narrative fits well into the idea of an independent, distributed global currency reserve system. The cryptocurrency is non-sovereign. Nevertheless, there are some limitations.
First, a global reserve currency needs to have an unfixed supply. The reason the financial system switched from the gold standard to the dollar was it lagging behind the economic growth, which led to its destabilization. Second, bitcoin is too volatile to become a global settlement mode.
Meanwhile, Facebook came closer to bring an alternative that could shake up the US dollar dominance. The social media giant’s Calibra project proposes to back its Liba cryptocurrency with a group of assets. But regulators’ stark distrust over Facebook’s corporate motives has dragged down Calibra.
Another such model is the International Monetary Fund’s Special Drawing Right (SDR). This basket of currencies, according to many economists, is positioned to become a unit of account in the future. Nevertheless, SDR backers have revealed no plans about including bitcoin to their basket till date.