The war in Ukraine and the consequent sanctions applied by the West have once again raised the issue of the US Dollar’s global dominance and the extent to which this benefits America both financially, because of the increased demand for dollars, and politically. The historian Niall Ferguson, a thorough scholar of the history of money, has called the soft power obtained through the dollar’s dominance “more valuable than boots on the ground”.
As N.S. Lyons wrote recently, China must be looking at the West’s use of currency as a weapon against Russia with some alarm. Benjamin Cohen, a veteran academic of international monetary relations, says that there is “no question” sanctions against Russia would further incentivise countries such as Iran, North Korea and Venezuela to diversify away from the dollar.
Barry Eichengreen (professor of economics and political science at the University of California, Berkeley) wrote about this, pointing out that while the share of dollars in global identified foreign exchange reserves has been falling for a generation (it is now under 60% when it used to be over 70%), diversification has not been towards the euro, sterling and yen, the other longstanding constituents of the IMF’s special drawing rights (SDR) basket. In fact, while a quarter of the shift has been towards China’s renminbi, three-quarters has been into the currencies of smaller economies such as Canada, Australia, Sweden, South Korea and Singapore.
(You will remember that Singapore’s dollar was one of the currencies in the reserve basket proposed by Facebook for its Libra digital currency.)
Not all stablecoins are the same and, as Frances Coppola pointed out, stablecoins such as USDC in fact performed as safe-haven assets during the recent market turmoil, thus proving to be more trusted than cryptocurrencies.
There is a clear market demand for such stablecoins, otherwise they wouldn’t exist. Professor Eswar Prasad, writing in the MIT Technology Review on the future of money, said that “Bitcoin, the cryptocurrency that started it all, may not have much of a role to play in this monetary future” because stablecoins of one form or another might well be more desirable to the average person than volatile tokens for speculators. He also suggests that, rather than leading to a proliferation of public and private currencies that compete on a level playing field, the emergence of digital currency could make economic power more concentrated than ever.
If major currencies such as the dollar, the euro and renminbi are available to citizens around the world, they might well displace the currencies of many other nations. Similarly, and in my view just as likely, the digital currencies issued by multi-national corporations might replace weak fiat currencies by exploiting their ecosystems. Seriously, the currency cold wars are about to begin!