Digital authorities strongly oppose the adoption of digital currencies

Digital authorities strongly oppose the adoption of digital currencies

In recent discussions, financial experts have been weighing in on the potential alternatives to the US dollar as the world's primary reserve currency. While several currencies have been proposed, including the euro, the BRICS countries' shared currency, and the Chinese renminbi, among others, financial analysts generally agree that these alternatives face significant structural or practical limitations that hinder their ability to replace the dollar in the near future.

Nat Benjamin, executive director of financial stability strategy and risk at the Bank of England, has outlined key considerations for fostering a steady-state liquidity environment that supports stability and growth. However, the focus remains on the US dollar, which continues to dominate the global financial landscape.

One of the most viable alternatives to the dollar is the euro, which makes up about 20% of global foreign exchange reserves. The euro benefits from a large economic size, a strong central bank, robust financial markets, and high export volume by the European Union. However, the euro faces challenges due to the lack of a common EU treasury and a unified European bond market, which weakens its attractiveness as a reserve currency compared to the dollar.

The BRICS countries (Brazil, Russia, India, China, and South Africa) have discussed creating a shared currency to reduce reliance on the dollar. While this concept is attractive politically, experts point to structural hurdles such as underdeveloped central banks, insufficient monetary policy coordination, limited market depth, convertibility issues, and lack of trust among BRICS members, making such a currency infeasible as a global reserve anytime soon.

The Chinese renminbi, despite China’s economic size, is constrained by capital controls, shallow financial markets, limited transparency, and convertibility restrictions. These factors have kept its role as a reserve currency limited and even caused it to lose ground against the dollar and euro in recent years.

Other currencies like the British pound and Japanese yen have small but stable shares of reserves (around 5% each), but none come close to challenging the dollar’s dominant role. Cryptocurrencies are also mentioned as a theoretical alternative but are dismissed by experts due to their volatility, limited acceptance, and lack of sovereign backing.

Mark Sobel, US chair at OMFIF, suggests that while the administration's actions may erode the dollar's dominance, it is not going anywhere soon. Massimiliano Castelli, head of strategy and advice at UBS Asset Management, asserts that reports of the dollar's demise are greatly exaggerated. Aaron Hurd, senior portfolio manager at State Street Investment Management, suggests that lower returns and higher risk mark a change in dynamics for the US currency, but the dollar's dominance remains persistent.

Despite the pressures for diversification, experts commonly emphasize the strength of network effects, market depth, liquidity, and crisis-management infrastructure that have entrenched the dollar’s role globally. While some signs of diversification exist, there remains no coherent institutional framework or realistic contender to replace the dollar as the primary global reserve currency in the foreseeable future.

Financial surveys reflecting reserve managers’ views show concerns about US data quality and market openness, with many expecting the euro to gain from geopolitical shifts, but also considerable skepticism that the dollar will be displaced soon.

In summary, the euro is the main feasible alternative though held back by political fragmentation; BRICS currencies face significant feasibility issues; the renminbi is limited by China’s financial controls; and cryptocurrencies are unsuitable. Experts thus perceive the dollar’s dominance as persistent despite pressures for diversification.

Jesper Koll, global ambassador and expert director of Monex Group, Japan, writes that de-dollarisation may provide an opportunity for Japan to move closer to the spotlight. Pierpaolo Benigno and Edoardo Reviglio, from the University of Bern and Yale Law School respectively, suggest that Europe has a strategic opportunity to develop its own safe asset. Herbert Poenisch, senior research fellow at Zhejiang University, argues that discussions about de-dollarisation fall short when it comes to finding a credible replacement for the dollar in cross-border transactions.

The senior economist at OMFIF, Yara Aziz, writes that doubts are growing about the foundations of dollar dominance. OMFIF's Global Public Investor series explores the investment strategies of central bank reserve managers, public pension funds, and sovereign funds across the world, with over 160 global public investors with over $24tn in total assets engaging with their market-leading reports and events in the past year.

[1] James, Harold. "The Return of Gold: Why Central Banks Are Turning to the Yellow Metal." Project Syndicate, 2021. [2] Paulus, Michael et al. "Central Banks and Gold: A Changing Role?" Citi GPS, 2021. [3] Søndergaard, Jens. "The Weaker Dollar: Opportunities and Challenges." Capital Group, 2021. [4] Kaushik, Sunil et al. "Gold: The New Safe Haven?" Citi GPS, 2021. [5] Cheung, Tobias. "The Global Reserve Currency Debate: A Persistent Dollar?" Citi GPS, 2021. [6] Tsui, Natalie. "The Future of the Global Reserve Currency: A Look Beyond the Dollar." Citi GPS, 2021.

1. Despite pressures for diversification, the US dollar continues to dominate the global financial landscape due to its robust network effects, market depth, liquidity, and crisis-management infrastructure.
2. The euro, while a viable alternative, faces challenges such as political fragmentation that hinder its ability to replace the dollar as the primary global reserve currency.
3. The BRICS countries' shared currency has feasibility issues, including underdeveloped central banks, insufficient monetary policy coordination, and limited trust among members.
4. The Chinese renminbi is limited by capital controls, shallow financial markets, and convertibility restrictions, making it unsuitable as a global reserve currency.
5. Cryptocurrencies are not a viable alternative due to their volatility, limited acceptance, and lack of sovereign backing.
6. Financial experts like Mark Sobel, Massimiliano Castelli, and Aaron Hurd perceive the dollar's dominance as persistent despite pressures for diversification.
7. Some experts suggest that de-dollarisation can provide opportunities for countries like Japan and Europe to move closer to the global spotlight.
8. Reports, such as those by OMFIF's Global Public Investor series, explore investment strategies of central bank reserve managers, public pension funds, and sovereign funds worldwide, indicating growing doubts about the foundations of dollar dominance.

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