The US dollar became the king of global currency after World War II at the 1944 Bretton Woods Conference, where forty-four countries agreed to the creation of the IMF and the World Bank.
Then, more than half a century later, the status of the currency is under threat, expressed in two main wayP: de-dollarization by BRICs and the presence of digital currencies such as bitcoin.
At the Annual Meeting of the New Champions in China, organized by the WEF, Professor Eswar Prasad, author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, speaking with Wang Feng, Editor-in-Chief, FTChinese.com said the currency financial system where one currency has so much power over all economies is an imbalance system.
“It is far from obvious that the current Financial system that we have is a good one, where one currency is so dominant and the effects of the central bank that issues that currency reverberate in every corner of the world.”
Moving forward, the author said that the development and use of “other forms of digital currencies” will bring about “more currency competition”. However, the speaker argued that the mere existence of a digital currency, such as the digital Renminbi, doesn’t fundamentally change the nature of international payments since most payments are already conducted digitally.
Interestingly, Prasad noted that while stablecoins, particularly those backed by the US dollar, are gaining traction, they might indirectly strengthen the dominance of the US dollar in international payments and as a reserve currency.
He said this in connection with the trend that says that the US dollar will not be relevant again. The deep and liquid US financial markets, even with significant debt levels, provide an advantage for the US dollar, although the erosion of the US institutional framework is acknowledged.
The speaker anticipated that the Renminbi may gain some traction as a payment and reserve currency as reserve managers seek diversification opportunities.
However, the Euro’s share as a reserve currency has been declining more significantly, potentially creating a situation of competition among second-tier currencies like the Euro, Japanese Yen, British Pound, Renminbi, and other emerging market currencies.
In all of the competition and innovation that will happen in the global financial market, I think that despite the decline in the use of the US dollar, it will remain relevant because “it has no serious rival.”
Democratizing money is still in the future
In the course of the discussion, the speaker highlighted that while it is important for regulatory frameworks to be designed for the digital economy, ensuring that we move towards a more inclusive and efficient financial system, the world is not ready for democratizing money.
He noted that the promise of democratization in finance remains in the future, and hopes that it can be achieved. However, there is a concern that, if not properly regulated, the cryptocurrency industry could take a darker path that undermines its potential benefits.
The speaker noted that the current trend is leaning towards greater centralization, particularly in stablecoins, custody services, and asset trading. This centralization contradicts the original intention of a decentralized architecture. Additionally, there is an increase in speculative financial activities and retail investors taking on excessive risks.