Chief Economist Gita Gopinath of the International Monetary Fund (IMF) said it’s unlikely that digital currency — or a “synthetic hegemonic currency,” which is a digital basket of reserve currencies — would replace the dollar as the dominant global monetary unit, according to the Financial Times.
Gopinath said that while Facebook’s proposed currency, Libra, has seen its prospects dim in the last six months, many central banks have been considering the adoption of public digital currencies. However, her central point was that it is unlikely for advancing payments technology to lower the cost of moving between currencies. The reason the dollar is so dominant, she added, is because of its relative safety and stability, and the legacy it's had for decades as the main unit.
“The dollar holds strongly reinforcing roles in trade invoicing — it accounts for five times the U.S. share of world trade — and global banking,” she said. “These have created large network effects: The more people use the dollar, the more useful it becomes to everyone else. This has been reinforced as emerging markets, which rely extensively on the dollar, increase their share of global economic activity. Their share of global domestic product now stands at 60 percent.”
The advancements in technology don’t automatically negate the necessary ingredients to becoming a worldwide reserve currency, Gopinath noted.
“Consider the euro, which has been the leading contender to replace the dollar over the past 20 years. Its impact on the dollar’s dominance has been modest at best, owing to financial fragmentation, inadequate fiscal risk-sharing and slow progress on the euro area’s governance framework. Uncertainty about the long-term stability of the eurozone does not help,” she said. “It is difficult to imagine how technology would address these issues.”
Technology alone can’t solve the problem of why there’s not a more balanced system, she added, one that would include a bigger part for the euro and the renminbi.