The future of the dollar-based international monetary system, which has long seemed unassailable, appears to be under threat, with Brazil, once the butt of Charles de Gaulle’s joke that it would remain “the country of the future”, potentially poised for the last laugh. Central bank digital currencies (CBDCs), a concept spurred by the anti-fiat Bitcoin protocol, could contribute to the forecasted shift. Advocates of Bitcoin often dismiss CBDCs as governmental tools for control, ignoring the potential for macro-level transformation.
Within the next decade, the adoption of CBDCs could stimulate de-dollarization, with implications for global economies, U.S. capital markets, and geopolitical relations. The central banks in Brazil, the United Arab Emirates, Russia, Singapore, and China currently explore CBDCs as part of their monetary strategies. These countries collectively contribute one-fourth of global output. With each being an important player in world trade, the international impacts of their currency strategies could be significant.
The shift may become more pronounced when these countries begin to use CBDCs to settle directly with each other, bypassing dollars, which are currently used in the majority of trade finance. Many anticipate this move, including Singapore’s DBS Bank opening the door to payments in China’s e-CNY and other multilateral institutions urging progress on collaborative CBDC design.
Public perception of CBDCs is currently focussed on consumer use and potential state surveillance of spending. Meanwhile, a wholesale, blockchain-enhanced framework for direct exchange of digital fiat currencies could impact international monetary systems significantly. Issues of trust between exporters and importers could be mitigated by cryptographically secure escrow structures, eliminating the need for dollar denominated middlemen.
A new role for CBDC-embracing central banks could emerge as clearing agents for their nations’ businesses, which may lead to the displacement of dollar-based correspondent banks. Economist Zoltan Pozsar argues we are moving towards a “Bretton Woods III” era, where the dollar loses its hegemony, and no single currency dominates. Instead of another currency taking over, the decentralization enabled by CBDCs could facilitate direct trade settlements in any agreed-upon currency.
Despite China’s active role in this, it is not expected to become the world’s reserve currency leader. However, its global influence is likely to grow as more of its trade contracts are denominated in renminbi. Even U.S. Treasury Secretary Janet Yellen has conceded that a gradual worldwide dollar reserve decline is probable.
Depending on the speed of this transition, it could hit the U.S. hard. Loss of foreign demand for dollars could raise capital costs, as U.S. bonds supported by these inflows control mortgage affordability for American citizens. A proactive U.S. response may involve concession to the changing reality and consideration of how to retain value by leveraging the still-desired dollar’s “soft power”.
This notion contradicts China’s centralized digital fiat currency model. Private players undertaking domestic-use digital money endeavors using decentralized crypto technology could be the real game-changer in monetary innovation. However, the U.S’s current political climate suggests they are far from this crypto-friendly paradigm shift.
Source: Coindesk
