The governor of the Bank of England just touted digital currencies as a possible replacement for the U.S. dollar as the world’s reserve currency. Such a digital asset, whether backed by central banks or even Facebook’s Libra stablecoin, would “dampen the domineering influence of the US dollar on global trade,” Mark Carney said in a speech on August 23 to the 2019 Economic Policy Symposium in Jackson Hole, Wyo.
Calling this type of asset a “synthetic hegemonic currency” (SHC), Carney suggested that a digital currency backed by a network of central banks would prevent economic conditions in the U.S. from spilling over “onto both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the U.S. economy.”
It would also prevent another fiat currency, notably China’s renminbi, from displacing the dollar but leaving the same problems in place, he pointed out.
Another reason to look at digital currencies as an SHC is that historically, the rise of a reserve currency is based first and foremost on its ability to reduce the cost and increase the convenience of international payments, he asserted.
Making international payments faster and cheaper is perhaps the single biggest factor pushing financial institutions to look at blockchain-based payment systems. Companies ranging from blockchain payment platform Ripple to banking giant JPMorgan Chase invested in cryptocurrencies to bypass the slow and costly SWIFT bank settlement system. It’s a big enough deal that even SWIFT—the biggest bottleneck in the system—has moved to partner with R3’s Corda distributed ledger technology (DLT) platform to ensure it doesn’t get cut out by cryptocurrency-based payments.
Carney even pointed to Facebook’s highly criticized and widely distrusted Libra cryptocurrency project as a possible private-sector solution, commenting that the stablecoin would be backed by a basket of currencies, not just one.
“There are a host of fundamental issues that Libra must address, ranging from privacy to [“anti-money laundering” and “countering the financing of terrorism” compliance] and operational resilience,” he pointed out. “The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch.”
Even so, Carney added, “it is an open question whether such a new SHC would be best provided by the public sector, perhaps through a network of central bank digital currencies.”