At a gathering of central bankers in Wyoming last week, the Bank of England governor said the outsized role of the dollar in global trade is coming to an end, and the time has come for a new international financial system based on a global electronic currency.
“The deficiencies of the international monetary and financial system have become increasingly potent,” said Carney. He went on to point out the pitfalls of relying on the dollar for international trade and government reserves in an era of trade wars, negative interest rates, and disruptive economic policies that can ripple out from the US to wreak havoc in smaller economies around the world.
Synthetic hegemonic currency
A global electronic currency could “dampen the domineering influence of the US dollar on global trade,'' said Carney, suggesting that the next phase of monetary evolution should aim to foster stability by mitigating the impact of the American economy on smaller nations.
The idea is not new. Back in 1969, the International Monetary Fund created 'special drawing rights' — an international reserve asset underpinned by a basket of five world currencies. But this artificial currency instrument found only limited use in the global financial system.
Carney's suggestions echo those of IMF chairman Christine Lagarde, who floated the idea of turning special drawing rights into a global digital currency in late 2017. 'IMFCoin', as it was labeled by the press, was to replace the dollar's role in global trade with a reserve currency that would be plugged into the world's biggest financial markets.
Facebook's Libra — which also relies on a basket of world currencies — has since rekindled the reserve currency conversation, and Carney's proposed scheme could theoretically take advantage of recent developments in blockchain tech to reduce global reliance on the dollar.
“The main advantage of a multipolar international monetary and financial system is diversification,” said Carney, suggesting that new technology could create what he calls a “synthetic hegemonic currency.”
Whether or not this should be delivered through a network of central banks, or from the private sector, remains to be seen.
Many Bitcoiners, such as Austrian Economics enthusiast Saifesean Ammous, make the argument that it is Bitcoin that will eventually become the world's default reserve currency.
The fall of the dollar
Though Carney's proposal is unusual as the UK is one of the closest U.S. allies, questions have long surrounded the dominant role of the dollar in global trade.
Governments across Europe and Asia have sought to usurp the currency by finding new ways to make international payments without SWIFT — the 45-year-old service that handles more than half of all cross-border interbank payments and effectively allows the US to weaponize the dollar by clamping down on trade activity in sanctioned countries.
But this global power is gradually dissolving. In Germany, work has begun on an independent payment system that according to Germany's Foreign Minister Heiko Maas, would "increase Europe's autonomy and sovereignty in trade, economic and financial policies", and allow trade with countries like Iran that have been sanctioned by the US.
Japan is also setting up an international network for cryptocurrency payments to act as an alternative to SWIFT, along with other countries seeking a way around financial sanctions imposed by the US. China too is racing ahead with its digital yuan, and Russia has been in talks with China, India, Iran, and Turkey about a SWIFT alternative designed explicitly to eliminate the risk of Western sanctions.
Combined with the perfect economic storm of negative interest rates and the war on cash, these schemes could be key to dethroning the dollar — which after almost a century of dominance, is approaching the average reign of a global reserve currency at 95 years.
As Carney suggests, now could be the perfect time to welcome in a new financial system, "The deficiencies of the international monetary and financial system have become increasingly potent. Even a passing acquaintance with monetary history suggests that this centre won’t hold."