The King is dead! Long live the King!
Here is our pick of the 3 most important Stablecoin news stories during the week.
The mighty US Dollar is the King of currencies. But, in today’s modern, connected and global world does it have the right characteristics to remain top of the heap?
After World War 1, the world adopted the US Dollar as its reserve currency. Firstly, by the fact that the US Dollar was the only currency that remained backed by gold and so everyone held reserves of it as well as physical gold. Then it was institutionally definitively confirmed at the Bretton Woods conference in 1944. The world would have one currency as it’s primary reserve and for large import/export contracts (Oil and many other commodities are only available in US Dollars).
Today, the wholesale (Regulated Financial Institutions) FX market transacts 6.6 Trillion per day (Bank of International Settlements survey 2019). The mighty US Dollar is on one side or the other of all those trades 45% of the time. It’s share has stayed reasonably constant over a long time.
Will it remain the reserve currency and has the game changed, where today the currency is only a component of what really matters? In today’s connected world, what is more important: the currency or the network that underpins it?
Think for a moment about Visa? It’s a US company as is Mastercard, Facebook, Amazon and Apple. Their network, ultimately controlled by US law, is as important as the US currency in ensuring that if I lived in a country that had somewhat dubious Governance with a somewhat dubious currency I would feel safest with US dollars using these companies networks as my means of exchange. Hence we see a number of countries such as Argentina, Venezuela and Zimbabwe to name a few have dual currencies, their own and US Dollar.
This notion of the importance of the underlying network became clearer last week when we saw that the Bank of England hires Accenture for 150 million pound overhaul of UK payment system. 150 million pounds which is the equivalent of 195 million US Dollars! Clearly not just an upgrade to the Real Time Gross Settlement System (RTGS), but a major overhaul of the entire payment network. By the way they leave the door open to DLT, Crypto Currencies and CBDC. Bank of England Building Payments Network to Support a Potential Digital Pound
This Bloomberg article explores the pro’s and con’s of all of the likely competitors to the US Dollar as a reserve currency. They look at the Gold, Euro, British Pound, Japanese Yen, Chinese Yuan and even Crypto Currencies (specifically Bitcoin or BTC). The Dollar’s Leading Rivals All Have Their Own Drawbacks
And, another Central Bank opens it’s mind to this new innovation. Clearly everyone is beginning to understand that in a few years time, if your currency is not Digital and therefore does not have the benefit of the common electronic networks that will be around at that time, it will lose it’s utility and the country will lose some of its sovereignty. Philippines Central Bank Considers Issuing Its Own Digital Currency
The next reserve currency or currencies will not only have to prove themselves in terms of trust, stability and transparent governance, but they will have to be delivered with an accompanying electronic network that enables the most consumers to transact in a seamless, inexpensive and fast manner.
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
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