A digital currency backed by the central bank could replace the dollar as the global hedge currency, Bank of England Governor Mark Carney said.
Speaking at the Economic Policy Symposium in Jackson Hole, Wyoming, on Friday Carney discussed the need for a new international monetary and financial system (IMFS), noting that while the US dollar has played a dominant role in the world order for a large part the last century. However, recent developments, such as increasing globalization and trade disputes, may have a greater impact on national economies at the present time than in the past.
Carney highlighted the use of the dollar in the issuance of international securities, its use as the main settlement currency for international transactions and the fact that companies use dollars as examples of their domain. However, “the evolution of the US economy, by affecting the dollar exchange rate, can have large indirect effects in the rest of the world.”
“While the world economy is rearranging, the US dollar remains as important as when Bretton Woods collapsed,” Carney continued.
Carney suggested a series of possible dollar replacements, including the Chinese renminbi and, above all, a digital currency backed by an international coalition of central banks. He said:
“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.”
“An SHC could cushion the dominant influence of the US dollar in world trade,” Carney said.
Technology can disrupt the current effects of the network that protect the dollar, he explained, and noted that an increasing number of transactions are made online and use electronic payments instead of cash.
While he made no explicit reference to cryptocurrencies, he noted that “the relatively high costs of national and cross-border electronic payments are fostering innovation, with new participants applying new technologies to offer more convenient and lower cost retail payment services.”
An example is the Libra cryptographic project proposed by Facebook, he said. The social media giant has proposed Libra as a payment infrastructure and a stable currency backed by a basket of national currencies.
To succeed, Libra needs to address regulatory issues, Carney said.
“The Bank of England and other regulators have made it clear that, unlike social networks, for which standards and regulations are only being developed after billions of users have adopted the technologies, the terms of commitment for any new systemic private payments system must be in effect long before any launch. ”
While a digital currency is not yet ready to replace the dollar as a global currency, “the concept is intriguing,” Carney said.
“It is worth considering how an SHC in the IMFS could support better overall results, given the scale of the challenges of the current IMFS and the risks in the transition to a new hegemonic reserve currency such as the Renminbi,” he said.
If this new SHC assumed greater participation in world trade, “shocks in the United States would have less potent side effects,” he suggested, adding:
“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.”