- WEF 2018: A Digital Currency Should be Adopted as the World’s Leading Reserve Currency
As the risk of a US-China trade war mounts, creating a geopolitically neutral and fair monetary system has become increasingly urgent. The shift from a unipolar to a multipolar world order has not been particularly orderly. Instead, it has produced a kind of monetary non-system that depends on a debt-driven, dollar-based model that is too pro-cyclical, fragile, and potentially biased to support the management of trade conflict.
At the root of the problem are the structural trade and current-account imbalances that arise from the so-called Triffin dilemma: in order to meet global demand for the US dollar as a reserve currency, the United States must run persistent current-account deficits with the rest of the world. Last year, that deficit reached $474 billion, or 2.4% of US GDP.
To be sure, the guarantee that the US, as the issuer of the dominant international reserve currency, can acquire low-cost funding for its fiscal deficit and national debt amounts to what former French President Valéry Giscard d’Estaing famously called America’s “exorbitant privilege.” But that privilege can erode the country’s fiscal discipline, as it has in recent years, resulting in high federal deficits ($833 billion, or 4.2% of GDP, in2018) and growing federal debt ($21 trillion, or 104% of GDP, as of March).
A better option is the IMF’s Special Drawing Right (SDR), which the second amendment of the body’s Articles of Agreement asserts should become the world’s “principle reserve asset.” Some – including former People’s Bank of China governor Zhou Xiaochuan and former Colombian finance minister José Antonio Ocampo – have since advocated following through on that plan.
Yet the SDR is not used widely enough to serve as a major international reserve currency. According to a Palais Royal Initiative report, a key way to raise the SDR’s global standing is through “regular allocations of SDRs under appropriate safeguards” or even allocations “in exceptional circumstances.” The report also calls for the IMF to work with the private sector “to explore ways in which the SDR could be more widely used in private transactions.”
A key hurdle for the SDR has always been the geopolitical interests and priorities of the reserve-issuing central banks (not just the US, but also the eurozone, China, Japan, and the United Kingdom). But the advent of cryptocurrencies may offer another way: the private sector can work directly with central banks to create a digital SDR to use as a unit of account and store of value.
Such an “e-SDR” would, in a sense, be the quintessential reserve asset, because it would be fully backed by reserve currencies, in the IMF-determined ratio. The supply of e-SDRs would be completely dependent on market demand.
Of course, to enable a gradual shift from the US dollar to an e-SDR as the dominant international reserve currency, a sufficiently large e-SDR-denominated money market would need to be created. To that end, a politically neutral body, owned by the private sector or central banks, should be established to issue the asset. Participating central banks and asset managers would then have to swap their reserve-currency holdings for e-SDRs.