Cryptocurrency News

IMF Chief Economist: Crypto Will Not Diminish US Dollar’s Dominance in Global Trade

IMF chief economist Gita Gopinath has poured cold water on expectations that digital currencies would dislodge the US dollar from its prominent position in global trade.

Explaining her stance, Gita wrote,

The dollar’s status is bolstered by the institutions, rule of law and credible investor protection that the U.S. is seen as providing.

She emphasized that the dollar accounted for five times the U.S. share of world trade and global banking. This was because the dollar is perceived as a safe and stable currency.

Social media firm Facebook recently unveiled the Libra cryptocurrency, which would be backed by a basket of currencies. Libra is facing strong opposition from national governments since its launch.

The former governor of Bank of England has suggested the creation of a global Central Bank Digital Currency (CBDC), which would be backed by a basket of reserve currencies. This would be a “Synthetic hegemonic currency (SHC).”

Gita is not convinced about the SHC; she argues that the global dominance of the US dollar combined with the fact that new and emerging economies that use the dollar for global trade would prevent the adoption of SHC.

It means that emerging economies would not accept a basket of currencies where their native currency is left out. This lack of consensus will ultimately spell doom for SHCs.

Countries like China, on the other hand, have been trying to launch their own national cryptocurrency. Several central banks are also trying to develop a digital currency, which will be backed by cash reserves.

Gita admits that shifting from fiat to digital currency would improve domestic trade but asserts that problems will crop up while shifting from one digital currency to another for global trade.

Gita cited the example of the Euro which could not compete with the dollar in international trade due to uncertain governance framework, lack of stability of the Eurozone as well as anomalies in risk-sharing among the EU nations.

The gist of Gita’s argument was that technological innovations are just not enough to replace the dollar. Stronger foundations are required for making a currency dominate global trade, something that all the variants of cryptocurrencies have failed to demonstrate.

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