Today, in an opinion piece in the Financial Times, the IMF’s chief economist Gita Gopinath argued that digital currencies won’t displace the dollar as the currency that dominates global trade and finance. She referred to both private tokens as well as central bank digital currencies.
Ledger Insights previously explored how China’s central bank digital currency – the DC/EP – might help the renminbi to challenge the dollar.
Gopinath asserts that the reasons for the dollar’s dominance are intangible factors such as a perception that the dollar is safe and stable. Additionally, this widely held opinion is reinforced through network effects. The more the dollar is used, the more it becomes useful to others.
Before becoming Chief Economist a year ago, Gopinath co-authored a Harvard research piece that explored this exact topic: “Banking, Trade, and the Making of a Dominant Currency.” The first point that the paper theorizes is that “a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value.”
Her key point is payment technologies, and the requirements of a global reserve currency are two separate topics. Instead, when deciding what currency to use, the factors considered are liquidity, stability and convertibility. However, the economist recognizes that in the future, the technological superiority of the issuing country could become important because of privacy and security concerns around digital money.
Although the US dollar is undoubtedly still dominant, by some measures, the IMF’s own figures point to a decline. For example, between Q1 of 2016 and Q3 of 2019, the US Dollar’s share of global reserves fell from 65.46% to 61.78%. Nonetheless, others, including the Brookings Institute, concur with Gopinath’s opinions about ongoing dollar dominance.
In a September analysis, a Brookings Institute report concluded that the “euro has stumbled, the renminbi has stalled, and dollar supremacy remains unchallenged.”
Meanwhile, Gopinath also addressed the Bank of England Governor Mark Carney’s ideas about a digital basket of currencies, the so-called “synthetic hegemonic currency“. She argues that central banks would need to coordinate and their inclination towards domestic priorities might make participation unattractive.
The economist concludes that the technology benefits of cheaper and faster cross border payments are a good thing. And a more balanced system with a greater role for the euro and renminbi is also desirable. But technology alone won’t bring that balance.