FinTechBlockchainMark Carney proposes a digital reserve currency

Mark Carney proposes a digital reserve currency

The US dollar is too dominant and could be replaced by a global digital alternative, according to the Bank of England Governor, Mark Carney.

Mark Carney, Bank of England governor, has proposed the creation of a global digital currency as a way of stabilising global financial systems and protecting the sector from trade and currency wars.

Speaking at the US Federal Reserve sponsored Jackson Hole Symposium in Wyoming, Carney said that a “Synthetic Hegemonic Currency” (SHC) governed by the public sector and backed by a number of central bank digital currencies could replace the US dollar as the global reserve currency, and that this would be preferable to the alternatives, such as the Chinese Yuan/Renminbi.

He said: “An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries. By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC.

Dollar a barrier to a sustainable recovery

In his speech on The Growing Challenges for Monetary Policy in the current International Monetary and Financial System, he compared the outcome of his proposal to the end of sterling’s authority on the international money markets a decade ago.

Carney said the dollar had reached a level of dominance that meant it was a barrier to a sustainable recovery.

He commented: “The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle, this would help reduce the volatility of capital flows to emerging market economies.”

Governments hoard dollars to cover the swings in the US economy, which in recent times have intensified, leading to a significant rise in the cost of borrowing.

Second best alternatives to the multipolar system

The Chinese currency, Renminbi (RMB), is often referred to as a substitute to the dollar along with proposed digital currencies such as Facebook’s Libra.

According to Carney, the RMB has a long way to go before it is ready to assume the mantle, but the building blocks are already there. Carney also clarified that using RMB is the “second best” solution to current problems and that a “multipolar system” would be better and current technology helps the world achieve this goal.

He added that digital currencies such as Facebook’s Libra are not in a position to take over from the dollar, but new technologies could allow for a global digital currency to challenge the US currency.

He noted that retail transactions are taking place increasingly online rather than on the high street, and through electronic payments over cash.

“The most high-profile of these has been Libra, a new payments infrastructure based on an international stablecoin fully backed by reserve assets in a basket of currencies including the US dollar, the euro and sterling. It could be exchanged between users on messaging platforms and with participating retailers,” he said.

“There are a host of fundamental issues that Libra must address, ranging from privacy to operational resilience. In addition, depending on its design, it could have substantial implications for both monetary and financial stability.”

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