TL;DR: Prepared remarks by the Governor of the Bank of England, Mark Carney, at the annual Economic Policy Symposium this week gave some insight into the central bank’s thinking on digital currencies and the US dollar’s future. Carney made the case for how, in his words, “Technology has the potential to disrupt the network externalities that prevent the incumbent global reserve currency from being displaced.”
Bank of England: Technology to Disrupt US Dollar’s Dominance
Since the late 1970s, the Federal Reserve Bank of Kansas City hosts a symposium in Jackson Hole, Wyoming. It’s a chance for “prominent central bankers, finance ministers, academics, and financial market participants from around the world […] to discuss the economic issues, implications, and policy options pertaining to the symposium topic.” This year’s theme was, “Challenges for Monetary Policy,” and was held August 22nd through the 24th.
Present at the gathering was Governor Carney from the Bank of England, a more than 300-year-old central bank upon which most are modeled. It holds enormous sway over fiscal policy in the United Kingdom, and serves as a psychological force for central bankers across the world. When it speaks, very important people listen.
Carney’s delivered 23-page paper, The Growing Challenges for Monetary Policy in the current International Monetary and Financial System, was particularly foreboding, warning of how the US dollar’s de facto status as reserve currency carries with it undue fragility. A decade’s worth of historically low interest rates and other factors has produced a hording system ripe for upending, especially by way of an as-yet created digital currency.
He characterized the US dollar as having a “domineering influence” with regard to “global trade,” which could very well be counteracted by a cabal of governments backing a virtual asset … no doubt alluding to the advent and technology behind cryptocurrencies. Such a cartel might be able to wiggle out of dollar dominance through invoicing this hypothetical digital currency, and if it caught-on “shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries,” he explained further. “The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around” a backed digital asset, “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.”
Carney didn’t point to any digital currency in existence as fitting the above bill, but that doesn’t mean one cannot be devised, as “the concept is intriguing.” A most obvious recent example would be Facebook Coin, Libra, of which the Bank of England’s first impressions seemed positive. Other central bankers have, of course, been less than enthused by the idea. Still, Carney seized on Libra, calling it “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.”
Ultimately, he steered clear of championing Libra proper, insisting the project had “fundamental issues” it “must address” before being taken seriously. “In the longer term, we need to change the game. There should be no illusions that the [internation monetary and financial system] can be reformed overnight or that market forces are likely to force a rapid switch of reserve assets. But equally blithe acceptance of the status quo is misguided. Risks are building, and they are structural,” Carney warned.
DISCLOSURE: The author holds cryptocurrency as part of his financial portfolio, including BCH.
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