After the disintegration of the Bretton Woods system, the dominance of the US dollar as an international currency suffered two major challenges as the global economic and trade landscape changed: the trend of internationalization of the Japanese yen and the emergence of the Euro. If the internationalization of the Japanese yen is a policy measure used by the United States to balance the economic and trade relations between the two countries, the creation of the Eurozone has made countries look forward to the emergence of a more balanced international monetary system. Unfortunately, even though the Eurozone’s share of international trade (14%) exceeds the US ’s share of international trade (11%), the fact that the US dollar is the only global currency has not changed.
From the perspective of the currency’s trading media function, the US dollar, Euro, British pound, Japanese yen, and RMB constitute the world’s major settlement currency system. According to the latest data from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), in March 2020, the US dollar accounted for 44.10% of the international settlement system, the Euro was 30.84%, and the RMB was 1.85%. However, if we look at the settlement proportion of currencies in international trade, the US dollar accounts for 85.83%, the Euro 6.65%, and the RMB 2.40%. From the perspective of the currency reserve function, the US dollar, the Euro, the yen, the pound, and the RMB constitute the world’s major reserve currency system. According to the latest data from the IMF, as of the fourth quarter of 2019, U.S. dollar assets accounted for 60.89% of foreign exchange reserves and euro assets accounted for 20.54%. From the perspective of currency foreign exchange trading volume, the US dollar, Euro, Japanese yen, British pound, Australian dollar, Canadian dollar, Swiss franc, and RMB are the main trading currencies in the global foreign exchange market. According to the latest data from the Bank for International Settlements (BIS), foreign exchange transactions in the US dollar accounted for 88%, the euro accounted for 32%, the yen accounted for 17%, the pound accounted for 13%, and the RMB accounted for 4%.
In terms of time, the three aspects of the international monetary system (international settlement, asset reserve, and foreign exchange transactions) have maintained a high degree of stability. Although the share of the US economy and trade in the world continues to decline, the dominance of the US dollar remains unshakable. The US dollar has the duality of “sovereign currency” and “super-sovereign currency.” In the foreseeable future, no other sovereign currency can do this.
Digital Currency a New Option
After the financial crisis in 2008, the US dollar-led international monetary system showed its inherent instability and the shortcomings of the international currency supply mechanism – the United States only provides emergency liquidity to its close allies, despite the international financial governance system. Certain changes have taken place, and regional financial arrangements are also in the ascendant, but the reform plan for the international monetary system based on national credit has obviously failed to make much progress.
Change often takes place on the fringes. When the situation of the United States as the only superpower has not changed, it is difficult for country-based currencies to replace the US dollar, but digital currencies provide a new direction for the development of the international monetary system. Although David Chaum proposed cryptocurrencies based on the fact that emails could be signed and encrypted in 1982, it has been nearly 40 years now, and the digital currency that has received the most widespread attention – Bitcoin – has been around for more than 10 years, but has not yet garnered mainstream support. However, the popular global digital stablecoin initiative in 2019 has really provided a new possible institutional option.
As far as the economic base is concerned, there are three main factors that determine whether a country’s sovereign currency can become a global currency – economic scale, openness, and stability. The Japanese yen lacks a certain degree of openness at the critical moment of internationalization, while the Euro is trapped in its political framework and cannot provide timely and effective security assets in times of crisis. However, Economist Robert Triffin has pointed out the dilemma of the Bretton Woods system, telling us through historical research that even though the emerging hegemonic currency, the US dollar, satisfies the above three elements, it took decades to replace the failed hegemonic currency, the GBP. The institutional inertia of the international monetary system is so resilient.
A Changing Monetary Landscape
Interestingly, the factors that hinder a new sovereign currency from becoming a global currency are becoming weaker in the era of the digital economy. This is mainly manifested in three aspects: First, the demand for international settlement is no longer concentrated in global trade, corporates, and large participants in the finance sector. Historically, international settlements that do not rely on physical currency have appeared in Amsterdam, Hamburg, and other places that serve import and export merchants. London has promoted the internationalization of the pound because of its excellent trade financing services. For these large players, the cost of switching international dominant currencies is huge – new pricing standards, new risk positions, and dealing with the losses faced by the old dominant currency reserves.
Therefore, it is particularly easy to maintain the status quo of the old international monetary system. In today’s highly globalized and digitized world, individual consumer participation in international settlements has greatly increased. The number of global Internet users and multinational travelers has doubled in the past 15 years, and cross-border e-commerce has allowed every consumer to directly participate in international settlements, and therefore they have experienced the slowness and high cost of traditional international settlements (such as currency conversion fees, etc.). Individual consumers are far less bound to a dominant currency than large players. On the contrary, they are more sensitive to transaction costs, and are therefore more likely to be attracted by the cost reduction brought about by digital payment technology, switching payment methods. From the domestic experience, based on individual consumers is completely enough to derive a new payment system (such as the rapid growth of third-party payment in China, M-Pesa’s expansion in Kenya, etc.). Therefore, the active cross-border payment of individuals has opened up potential competition for international payment currencies.
The Opportunities for Stablecoins
Second, large technology companies have surpassed sovereign states and formed their own service networks. If calculated in terms of volume, 64 of the world’s top 100 economies are companies, not countries, which actually reflects a change in the organization of human economic behavior. Such changes make it possible for digital stablecoins that promise to maintain value stability to overcome the network advantages of existing dominant currencies, and the Japanese yen or Euro did not have such opportunities. Taking the Euro as an example, even within the Eurozone, which has had a single currency area for nearly 20 years, 40% of websites only sell products to domestic consumers. At the same time, only one-third of consumers from other EU countries buy goods. But if we consider the prospect of digital currencies – including the stablecoin Libra, even if only based on WhatsApp’s 1.6 billion global users, a huge international settlement network will be formed instantly. For other types of digital stablecoins, even the government-issued digital stablecoins, such network opportunities have not disappeared, and some form of public-private partnership can also allow government-backed digital stablecoins to have a huge network.
Third, the vast majority of developing countries that produce commodities and non-monetary hegemonic developed countries are more motivated to accept a change in the payment system. Compared to World War I and World War II, countries did not realize the flaws of the gold standard, and most of them cooperated with the efforts of the British government to maintain the gold standard. At present, all countries have realized the flaws in the US dollar-led international monetary system. And expect the international currency system to be more balanced and diverse. For developing countries, the lack of a convenient and mature payment systems in China has brought greater benefits to developing countries. In terms of accepting international remittances, the World Bank’s 2017 survey pointed out that the average cost of international remittances is as high as 6.84%, and the improvement of the international payment system based on digital technology will undoubtedly be welcomed by developing countries. Finally, developing countries that do not have mature financial markets are more affected by global liquidity inflation in the US, More stable global liquidity arrangements are also welcomed.
To sum up, the factors that influence the success or failure of a potential international cryptocurrency in the digital era, the role of institutional inertia has greatly weakened, but stability is still an important factor, so it is difficult for digital currencies such as Bitcoin to lack value anchors to become international currencies, but digital stablecoin cryptocurrencies constitute a challenge to the existing monetary system.