Is global currency the next step?

The precarious stability and certainties that the world had until 2019 are rapidly disappearing due to the coronavirus pandemic and the economic crisis, which is also questioning the preeminence of the United States Dollar as the global reserve currency.

This is not the first time, of course, that the Dollar is challenged in the midst of a major disaster. However, it is expected that the trends that emerged after the 2008 financial crisis, such as the strengthening of the Yuan, the Euro and the digital currencies, will now accelerate given the dimension of the economic meltdown we are facing.

Just as an example, the United Nations Conference on Trade and Development (UNCTAD) is calling for a USD $ 2.5 trillion rescue package for developing countries, warning in a new analysis that the deteriorating global conditions, as well as the fiscal and foreign exchange constraints, will result in a USD $ 2 trillion to USD $ 3 trillion financing gap over the next two years.

Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc and pictured in Warsaw, January 26, 2011. REUTERS/Kacper Pempel

The report stresses that after the COVID-19 virus began spreading beyond China, developing countries as Mexico took an enormous hit in terms of capital outflows, growing bond spreads, currency depreciation, lost export earnings, falling commodity prices, and declining tourist revenues.

In the face of the “looming financial tsunami,” UNCTAD proposes a strategy that includes a USD $ 1 trillion liquidity injection for those being left behind through reallocating existing drawing rights at the International Monetary Fund (IMF); the cancellation of USD $ 1 trillion in debts owed by developing countries, and a USD $ 500 billion Marshall Plan for recovery funded from some of the missing official development assistance long-promised yet not delivered by leading economies.

Is the current financial system able to meet this challenge?

It is worth recalling that a 2010 survey released by the UN Department of Economic and Social Affairs following the U.S. recession stated that “the Dollar has proved not to be a stable store of value, which is a requirement for a stable reserve currency.” The report supported a proposal long advocated by the IMF to create a standardized international system for liquidity transfer.

Under this system, countries would no longer have to buy up foreign currencies, as China has long done with the Dollar. Rather, they would accumulate the right to claim foreign currencies, or special drawing rights (SDRs), rather than the currencies themselves.

The SDRs would be backed by a basket of currencies, which would make them less susceptible to volatility in any one currency. And because the value of a SDR is defined by the IMF, changes in the value of any one currency could be adjusted for.

This scenario also opens up a great opportunity for digital or cryptocurrencies, highlighted by the decision of the U.S. Federal Reserve in November to analyze the costs and benefits of developing a digital currency that would be directly available to business and households, despite its initial negative reaction to Facebook’s Libra and other projects from JPMorgan and Wells Fargo.

Long-term jeopardy

Just before this announcement, U.S. lawmakers wrote to Fed Chairman Jerome Powell, expressing their concern “that the primacy of the Dollar could be in long-term jeopardy from the wide adoption of digital fiat currencies,” adding that “it may become increasingly imperative that the Fed takes up the project of developing a Dollar digital currency, ”considered by other members of Congress as a potential risk to monetary policy and financial regulations.

“I think we agree that Libra raises a lot of serious concerns, and those would include privacy, money laundering, consumer protection, and financial stability,” declared Powell.

However, other countries, regional blocs, and corporations, from China to Great Britain, the European Union, and Sony, are also studying the benefits that cryptocurrencies would offer, aware that the world increasingly becomes digitized and that the own U.S. isolationist policies — not to mention its huge debt and the sanctions imposed on other nations — are undermining the greenback.

In an analysis of digital currencies planned by central banks obtained by EL UNIVERSAL English, Jonny Fry, CEO of TeamBlockchain Ltd in London, explained that the United States’ economic importance has to a great extent been based on the use and power of the Dollar, recalling that Great Britain’s Sterling held such status as the global reserve currency from 1815 to 1920. Before this, it was the French Franc in the Napoleonic period, preceded by the Dutch currency from 1640 to 1720.

“All these currencies ultimately gave way to a new currency and typically after 100 years. The Dollar has been the global reserve currency since 1920, i.e. 100 years — but, you know the saying… nothing lasts forever! ”Fry remarked.

Source: El Universal

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