Bank of England governor Mark Carney has posited the creation of a network of central bank digital currencies as a means of overcoming the destabilising dominance of the US Dollar on international trade.
In a presentation at the Jackson Hole gathering of central bankers, Carney took a swipe at the dollar's position as a global reserve currency, arguing that international reliance on the note has laid the foundations for a liquidity trap that combines ultra-low interest rates with stunted growth prospects.
Furthermore, the protectionist trade wars waged by the current Trump administration has fulled a level of instability in global trade with potential spillovers for both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the US economy.
Carney references Facebook's 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 - as an example of an alternative to the current monetary hegemony.
"Depending on its design, it could have substantial implications for both monetary and financial stability," he says. "The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch. As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies."
Even if the initial variants of the idea prove wanting, the concept is intriguing, he adds, aiding the support of better global outcomes by dampening the domineering influence of the US dollar on global trade.
Carney concludes: "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.
"The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new SHC 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 EMEs.
"Widespread use of the SHC in international trade and finance would imply that the currencies that compose its basket could gradually be seen as reliable reserve assets, encouraging EMEs to diversify their holdings of safe assets away from the dollar. This would lessen the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap."