Global Reserve Currency: Mark Carney Pitches Crypto Replacement to U.S. Dollar

August 27, 2019 | Digital Assets
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Bank of England governor Mark Carney wants to switch to a “Synthetic Hegemonic Currency.”

A Global Reserve Currency for the markets? That’s what one prominent central banker recommended in a recent speech. The reason: Trade and currency wars have rocked global financial systems in recent times.

In a speech at Jackson Hole, Carney proposed the creation of a “Synthetic Hegemonic Currency” (SHC). This currency would replace the US dollar as the global reserve currency.

Why an SHC – or Global Reserve Currency

“An SHC could dampen the domineering influence of the US dollar on global trade,” Carney said.

“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 emerging market economies (EMEs),” he added.

“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.”

On the Renminbi

According to Carney, the Chinese renminbi currency had shaped up. However, it had a “long way to go before it is ready to assume the mantle.” It was not the ideal solution.

Given the availability of technology, the preferable solution was for an SHC. Governments would run the SHC. A basket of central bank digital currencies would then back the assets.

Such a basket would lead to “better global outcomes, given the scale of the challenges of the current IMFS (international monetary and financial system) and the risks in transition to a new hegemonic reserve currency like the renminbi,” Carney suggested.

On Facebook’s proposed Libra digital currency versus a Global Reserve Currency

Carney discussed payment systems and new players in the space like Libra.

“The most high profile of these has been 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,” Carney said.

He continued: “It could be exchanged between users on messaging platforms and with participating retailers. There are a host of fundamental issues that Libra must address, ranging from privacy to AML/CFT and operational resilience. In addition, depending on its design, it could have substantial implications for both monetary and financial stability.”

On changing the International Monetary and Financial System

“Risks are building, and they are structural,” Carney warned.

Carney also quoted Rudi Dornbusch. “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could,” he said.

“In the longer term, we need to change the game. When change comes, it shouldn’t be to swap one currency hegemon for another.”

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