Can the central bank digital currency replace the US dollar in the future?
Source: Crypto Valley Live Author: Patrick Tan Translation: Zoe Zhou As the People's Bank of China is expected to issue its own digital currency this year, central banks in various countries are also considering whether to follow suit. This raises a bigger question: Will the issuance of digital currency by the central bank replace the dominant US dollar? In the "Star Wars" directed by George Lucas, the outer regions of the galaxy are fictional. Alien spice merchants use a C3-PO-like translation robot to trade with human-like "alien planets" and the price of galaxy goods Bargaining with each other. At the same time, the more evil elements of alien smugglers, bounty hunters, and the galaxy are indulging in a variety of exotic spirits in the Mos Eisley tavern. Luke Skywalker, played by Mark Hamill, wants to be a Jedi, and he negotiates with the infamous smuggler (Harrison Ford) on the world channel. What these negotiations have in common is the basic value unit, which is common to the entire galaxy, the Galaxy Credit Standard. In a galaxy as distant as in Star Wars, a common currency—credit for short—is like a force that connects all living things together, and connects all galaxy trade and business Basic elements together. "Information is a commodity. It can be traded, sold, and bought. In the end, they can buy as many secrets as they have credibility."-Darth Bane However, somehow, on a planet in our galaxy, generations of people on the planet have not used the same currency, but this is not because people have not tried. Coin a better currency Social media giant Facebook announced plans to launch its own digital currency, Libra, which will be backed by a basket of stable government securities and other currencies. In the six months since its release, global market discussions of the future of currencies have undergone irreversible changes. Although Libra's prospects are bleak, central banks of major economies have also begun to consider whether they should join the ranks of digital currencies under the pressure of the Central Bank of China to announce the issuance of DCEP. Some analysts believe that the issuance of private digital currencies such as Libra and digital currencies supported by the central bank such as the Chinese digital renminbi may exacerbate the dominance of the US dollar and compete with the dollar (not a pun). Outgoing Bank of England Governor Mark Carney recently even suggested that new technologies like blockchain technology could be part of a "synthetic hegemonic currency"-a basket of digital reserve currencies-the global credit standard in Star Wars . However, if there is a revolution in the constitution that constitutes "currency", at least in the short term, the challenges brought by the central bank's issuance of digital currencies are unlikely to threaten the dominance of the US dollar. Indomitable dollar To be sure, advances in payment technology have reduced the cost of moving from cash payments to digital payments. Driven by a low-cost, user-friendly payment system, China's WeChat Pay and Alipay provide a variety of seamless docking services on one platform. But with the exception of cross-border digital payments, little progress has been made in reducing the cost of inter-currency and cross-border capital flows, and not all of these costs can be measured in money. The general view of the security and stability of the US dollar made the US dollar dominate the post-war international monetary system. The US dollar has a strong self-reinforcing role in trade valuation, accounting for five times the United States' share of world trade and global banking, which has created a huge network effect for the US dollar. The more people use the dollar, the more useful the dollar is to people. In this sense, it's like Facebook. You may never have thought about creating a Facebook account, but because all your friends play Facebook. And you don't want to miss anything that happens in their lives, so you have no choice but to sign up. This powerful network effect is why so many lawmakers and regulators around the world are so opposed to Facebook's release of Libra. With the increasing share of emerging markets in global economic activity, which now has a 60% market share, they are becoming increasingly dependent on the US dollar. In many emerging markets, from Africa to Asia, the dollar is still highly valued and accepted. Demand for the dollar is not something that the yen or the euro can quickly change after digitization. Although the digital currency issued by the central bank may help reduce payment friction, it did not ultimately address the conditions required for digital currency to become a global reserve currency.
Not all currencies are equal
When the euro was born, many hoped that it would one day be a strong contender for dollar hegemony. Twenty years have passed. Due to the fragmentation of the economies that support the euro, differences in the level of economic development of the euro zone countries, and insufficient fiscal coordination and risk sharing, the euro has been struggling. Today, the euro represents an ideal currency, which is expected to represent a diversified economic region, but has not reached its full potential. The long-term stability and unity of the euro area make the euro unable to challenge the dollar. What about RMB? China's efforts to promote the internationalization of the yuan have had limited success. Although the Chinese government has adopted a coordinated policy, China is also the second largest economy in the world and provides liquidity support through bilateral swap agreements with more than 30 central banks, but the renminbi accounts for only more than 2% of global transactions. The digitization of the renminbi may not help speed up the use of the renminbi in global trade, because it is not just technology but institutions that form the basis of the global reserve currency. When governments, investors, traders, and central bankers want to choose digital currency cross-border transactions, they may consider the same factors as in the past-liquidity, stability, and convertibility-with an additional factor, namely the issue National technological advantage. Because when it comes to digital currency, privacy and security are the real issues to be considered, and the counterparty must undoubtedly also consider whether the digital currency issuing country has reliable technology. Except for the United States, few other countries are able to meet all the standards of global digital currencies. The United States is a global leader in combating money laundering and the financing of terrorism. As the country with the most powerful economic and military power in the world, the United States plays the role of a global police. This is a role established since the Truman administration, which means that the value of the US dollar far exceeds the cotton paper it prints. Blockchain technology itself will not become a global digital reserve currency.
Synthetic hegemonic currency
Trade and financial contracts are still denominated in a single currency, the US dollar, rather than a basket of currencies. For a "synthetic hegemonic currency" to work, it must have the support of various central banks. These central banks provide the basis for "synthetic hegemonic currencies" to ensure currency stability and reduce perceived risks. Moreover, if based on the experience of the euro, the coordination and cooperation needed to support a multilateral "synthetic hegemonic currency" is also extremely challenging for all parties. Considering that a truly "global hegemonic currency" will need to span a vast geographical area, and cohesive fiscal and monetary policies separated by national interests, cultural differences and time zones, it is not difficult to see why the world is still far away from "galactic standard credit" Very far. Because global demand often conflicts with domestic monetary policy goals, major reserve currencies often lack the incentive to participate in creating such a global "synthetic hegemonic currency." As people become increasingly disappointed with globalization and the rise of populism and nationalism, it is difficult to say whether the world is entering another era of introspection and deglobalization. Many attempts at globalization have not yielded good results, often ending in global conflicts. For the past 65 years, relative global peace and internationalization have remained an exception in world history, not the norm. This peace and globalization is largely due to the role of the United States as a global financier and global oversight agency in global coordination, and the current U.S. government appears to be weakening that role. The biggest threat to the dollar is American isolationism, not digital currencies in other countries. The dollar may never lose its dominance because of another currency, but if the United States decides to abandon other countries and regions, it will lose its position in international trade and finance. The euro, yen, yuan, and even BTC, these emerging currencies themselves do not have enough funds to launch a serious challenge to the dollar. Considering that the euro, the yen, the renminbi, and even the BTC have the value against the dollar, it is because the thing being measured cannot be greater than the thing used for measurement, and it is clear that the dollar effect will not disappear soon. But the Trump administration has caused immeasurable damage to the global position of the United States and the reliability of its foreign policy over the past three years. In the decades from now, historians will conduct a lot of research on the United States during this time, trying to figure out whether the Trump administration is a watershed or a slowdown in the United States' global role and leadership. How the world views the US's global leadership position will have a profound impact on the role of the US dollar in global trade and finance.
repair
To be sure, the international monetary system needs to play a role. Even in a technologically advanced and financially developed country like the United States, nearly 7% of Americans had no bank accounts in 2017. Globally, millions of migrant workers lose up to 14% of their remittances when they repatriate their money back home. However, because global remittances affect the poor and the unrepresented more than any other population in the world, their remittances are often easily overlooked or forgotten. This has not weakened the fact that the world needs cheaper and faster cross-border payments-the settlement of cross-border remittances remains stagnant and expensive for those who are least likely to bear the cost of remittances. Depressing. In this regard, BTC and blockchain technology are considered solutions to this seemingly intractable problem. Since cross-border transactions rely so heavily on so-called "trusted third parties", why not make technology platforms a platform to alleviate trust? Although BTC and blockchain technology have not reached their potential, this is not because they have not been tried. Blockchain technology has the potential to bring rapid returns to global remittances and improve financial inclusion. Recognizing the potential and risks of blockchain, both the G20 and the International Monetary Fund (IMF) have begun to assess the impact of global stable currencies (such as China's forthcoming digital renminbi) on the macro economy. But technology itself is not a global reserve currency. The dollar continues to dominate, largely because of its strong system, while the euro struggles under the euro zone's fiscal and monetary architecture. In the absence of stronger domestic institutions, transparency and market liberalization, global acceptance of the yuan has been tepid. In this context, people can easily tout BTC and blockchain technology or other digital currencies as a good recipe. Considering the current development of digital currency, blockchain technology and BTC, the envisaged currency and fiscal utopia will still appear in the future. To be fair, BTC has not been around for a long time, only a little over 10 years. This period of time is enough to establish its own nascent code derivative institution, but it is much shorter than the United States has established in the past two and a half centuries. BTC and blockchain technology may one day challenge the dollar, but the technology itself is not enough to pull the dollar off its current position. To do this, we need stronger political and technical institutions. So far, BTC institutions are purely technical, and only time will tell if they will become politicized. Money is not only a means of storing value, a unit of measure, and a medium of exchange. It is also, to a large extent, an ideology and a set of expressions and manifestations of specific values. The dollar represents democracy and freedom, and even the digital renminbi cannot reasonably apply these values. Because value is given not only to what it can buy, but also to what it can represent. In this regard, the US dollar is still ahead of all other currencies.
