Bank of England Governor predicts US Dollar dominance will be replaced by digital currency SHC

The Governor of the Bank of England in a speech given at a gathering of the central bankers predicts that the emerge of the digital currencies and their advantages will not only disrupt the financial sector but have the potential to end the days of the US dollar dominance: “Retail transactions are taking place increasingly online rather than on the high street, and through electronic payments over cash. And the relatively high costs of domestic and cross border electronic payments are encouraging innovation, with new entrants applying new technologies to offer lower cost, more convenient retail payment services.” – he declared in his speech here.

He wonders if a new Synthetic Hegemonic Currency (SHC) would be a best alternative to the US dollar in the global trade:

“… it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.

Even if the initial variants of the idea prove wanting, the concept is intriguing. It is worth considering how an SHC in the IMFS could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi. An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries. By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC.

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 EMEs. 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. Of course, there would be many execution challenges, not least the risk of fragmentation across Digital Currency Areas. But by leveraging the medium of exchange role of a reserve currency, an SHC might smooth the transition that the IMFS needs.”

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