Ever since bitcoin has become a dominating cryptocurrency in the digital currency market, it has been in the talks for being a potential replacement for the dollar as a world reserve currency. However, it’s easier said than done. To find a currency with the power equal to or more than the dollar that can also overcome the dollar’s limitations to become a truly global cryptocurrency is not easy, even if possible.
When we talk about digital currencies as a proposed world reserve digital currency, all the possible options fall into the following three categories:
- Digital currencies that are dependent on central banks
- Currencies that are issued by central banks
- Currencies that are completely independent of central banks
The mere definition of Cryptocurrency indicates that it’s a digital currency that operates on the principles of decentralization, i.e. works independently of any centralized entities such as governments or banks. However, governments around the world cannot possibly allow a cryptocurrency, which they have no control over, to manage the world reserves.
So, ideally, the next replacement of the dollar as a world reserve currency will be a digital currency with somewhat dependency on banks or other central entities.
Let’s discuss the three possible use cases in detail.
Digital currency dependent on central banks
The best case scenario is the introduction of a digital currency whose value would be dependent on or controlled by central banks. For instance, the proposed Libra coin by Facebook was said to be a central-backed digital currency that could represent the value of existing reserve currencies like the dollar. In that case, the dollar would continue to remain as a global reserve currency while the digital currency would be used as its substitute for international trades.
Whether it would be a privacy currency or a government currency that becomes the next potential world reserve currency is still a matter of debate.
One thing that central banks around the world agree on is that they need to come up with their own solution to the global payment problems and need to do it fast before a private actor organization takes control of most of the global transactions.
Digital currency issued by central banks
Another possibility that also has a huge backing from governments around the world is that central banks might launch their own digital currencies, called central bank digital currencies (CBDCs), as a replacement or complement to the existing world reserve assets.
“Such a currency, if ever launched, could be either completely controlled by central banks or partially controlled, allowing users more control over their payments. In any case, this would solve the central banks’ woes that a private global currency might give private organizations more control over the world reserves,” said founder and CEO of the DCI Ecosystem.
At the same time, some authorities are also concerned that allowing a single digital currency to have the power to control the world reserves will only swap the problem and not solve it. For instance, the dollar presently dominates most of the world reserves, somewhat limiting small countries’ power to control their own monetary policies. If this has to change, we need not one, but a network of digital currencies, suggested Mark Carney, Governor of the Bank of England.
One thing is clear – if a CBDC is indeed introduced by the central bank, it could most probably give users direct access to the central bank, thus limiting the role and need for commercial banks and entities.
Cryptocurrency as world reserve currency
Another possibility, one with the least probability, is that a cryptocurrency like Bitcoin will act as the world reserve asset. Cryptocurrencies by their true nature are independent of central entities and therefore cannot be controlled or governed by central banks.
Bitcoins, as you might know, are not issued by any central banks or entities, but they are created during the mining process by users, i.e. common people. Even the flow or supply of bitcoins is not controlled by centralized entities, rather they are independently traded on platforms called crypto exchanges.
The market price of cryptocurrencies is also not managed by any bank or authority but totally depends on their supply and demand. And since most cryptocurrencies have a limited supply, both their demand and price will automatically keep increasing with time.
One thing that acts as the major hurdle in bitcoin becoming the world currency is the fact that the transaction speed involving bitcoins can be quite slow, especially when processing huge transaction volumes. But, there are other cryptocurrencies like Ripple and Litecoin that claim to have solved this problem through their more efficient and faster system.
To sum up,
As of now, most of the digital currencies in the market are developed and managed by the private sector, which means their probability of becoming a global reserve currency is limited. The best we can hope for is for central banks to either find a way to speed up international payments or create their own digital currencies to replace the money.
So, we can’t simply ignore the possibility that in the future not so far there could be a digital currency worthy enough to act as the new world reserve currency.