The IMF warns that central banks may have to rethink their cash holdings. In a recent study, the global lender highlights the changing geopolitical landscape, technological advances and the impact of the Covid-19 pandemic as events that are likely to influence the composition of reserves.
Advances in Financial Technologies
In addition to the US dollar, other currencies such as the Euro, Japan pound and Britain act as settlement currency in global trade. Still, it is the US dollar that dominates in terms of its status as the world’s reserve currency.
However, in a study, whose findings are shared through the global organization’s blog, the IMF says the pandemic-inspired “advances in financial and payment technologies” are likely to “affect the future composition of contingencies. ”
According to the blog authors, many central bankers are now aware of private publishers’ threats of digital currency, such as the Facebook-backed Diem. As a result, some central banks may try to counter this threat by issuing their own digital currency. The authors write:
(The) potential competition from private publishers like Diem – Facebook’s blockchain-based payment system – has spurred large central banks to accelerate work on central bank digital currencies and cross-border payments.
Diem Association is an independent organization that governs the blockchain payment and Facebook is one of 27 member companies.
Organizations such as the European Central Bank and the People’s Bank of China, which are already “exploring the issuance of central bank digital currencies,” believe that their eventual success could “increase demand for their currency.” In turn, this growing demand will accelerate the dumping of the US dollar as the preferred global reserve.
Superior Technology exists
Still, the IMF blog post reminds central bankers that digital currency issuance does not guarantee acceptance as an alternative currency. Instead, only “advanced technology platforms” can help new currencies “overcome some of the benefits of currency.” The authors conclude their thoughts on this contingency topic saying:
Depending on the adoption and use of public or private digital currencies, central banks may have to rethink what reserves are, and how to hold, going forward.
In the meantime, the blog also cites changes in international finance, volatile trade relations and invoicing practices as other factors that could drive the rapid transformation of the reserve status quo.
Editor’s note: This article was updated to reflect that Facebook is one of the 27 member companies of the Diem Society.
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