For decades, due to the power that the U.S. wields in finance and in war, the U.S. dollar has been the reserve currency for the world. A majority (if not all) central banks hold the currency, a majority of global commerce involves the transaction of greenbacks, and the U.S. dollar has performed extremely well over many foreign currencies over the past few decades.
Yet a new report from JPMorgan Chase & Co. indicates that the long unquestioned dominance of the U.S. dollar will soon be threatened by the rise of central bank digital currencies.
JPMorgan: Central Bank Cryptos Threaten U.S. Dollar’s Reserve Currency Status
According to Bloomberg, analysts at the multinational bank said in the report that the introduction of digital currencies by big central banks will potentially threaten the efficacy of the U.S. dollar in global commerce. They wrote:
“There is no country with more to lose from the disruptive potential of digital currency than the United States. This revolves primarily around U.S. dollar hegemony. Issuing the global reserve currency and the medium of exchange for international trade in commodities, goods, and services conveys immense advantages.”
JPMorgan did say that it is unlikely the U.S. dollar will be toppled as the world’s reserve currency anytime soon, though it’s likely disruptions will take place in certain sectors where digital currencies make sense over dollar systems — such as the SWIFT payment network, which is slow and costly compared to newer digital tech.
A Timely Report
JPMorgan’s report is very timely: the past few months have seen the fundamental case for central bank digital currencies gain strength due to the outbreak of COVID-19.
An April 3rd bulletin from the Bank of International Settlements — the so-called “central bank of central banks” — indicated that COVID-19 is accelerating the world’s distaste for cash payments, making CBDCs that much more logical:
“Resilient and accessible central bank operated payment infrastructures could quickly become more prominent, including retail central bank digital currencies (CBDCs).The pandemic may hence put calls for CBDCs into sharper focus, highlighting the value of having access to diverse means of payments, and the need for any means of payments to be resilient against a broad range of threats.”
The report also coincides with an increase in resistance to the U.S. dollar by central bankers.
Mark Carney, an economist who served as the head of the Bank of Canada and the Bank of England, said at a central banker meeting in the U.S. last year that there should be a push for a global stablecoin to end the dominance of the dollar. He postulated that the U.S. dollar may actually be hurting certain economies, especially those deemed “emerging market,” explaining:
“The dollar’s influence on global financial conditions could similarly decline if a financial architecture developed around the new [digital currency] 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.”
Bitcoin Is a Threat As Well
JPMorgan identified central bank digital currencies as a threat, but that’s not to say that Bitcoin and decentralized cryptocurrencies hold a role in macroeconomic trends too.
Some investors are coming to grips with the long-term impacts of the ongoing recession and the central bank response and are finding that Bitcoin is making more and more sense as a macroeconomic play.
Paul Tudor Jones, a billionaire hedge fund investor, made this narrative apparent when he announced this month that he will be personally and professionally investing in Bitcoin because he sees it as a hedge against the debasement of fiat currencies.