The International Monetary Fund warned that the central bank may have to reconsider the composition of its reserve currency holdings. In a recent study, the global lending institution pointed out that the changing geopolitical landscape, technological progress, and the impact of the Covid-19 pandemic may affect the composition of reserves.
Advances in financial technology
In addition to the U.S. dollar, other currencies such as the euro, yen and pound sterling are also settlement currencies in global trade. However, in terms of the US dollar’s status as the world’s reserve currency, the US dollar still dominates.
However, in a study sharing research findings through global institutional blogs, the International Monetary Fund did state that the “advanced financial and payment technology” triggered by the pandemic could “affect the future composition of reserves.”
According to the blogger, many central banks are now aware of the threat of privately issued digital currencies, such as Facebook’s Diem. Therefore, some central banks may try to counter this threat by issuing their own digital currencies. The author wrote:
Potential competition from private issuers such as Diem (Facebook’s blockchain-based payment system) has stimulated major central banks to accelerate central bank digital currency and cross-border payments.
Institutions like the European Central Bank and the People’s Bank of China are already “exploring central bank digital currency issuance”, and they believe that the ultimate success in this area “may increase the demand for currency.” In turn, the increase in demand will accelerate the dumping of the US dollar as the world’s preferred reserve currency.
Excellence in technology prevails
However, a blog post by the International Monetary Fund reminds the central bank that merely issuing digital currencies does not guarantee its acceptance as another reserve currency. On the contrary, only “advanced technology platforms” can help new currencies “overcome certain advantages of existing currencies.” The author summarized the views on this reserve currency and stated:
Depending on the adoption and use of public or private digital currencies, the central bank may have to reconsider what reserves are and how they hold reserves.
At the same time, the blog also pointed out changes in international finance, changing trade links and billing methods, and other factors that may accelerate the change in the status quo of reserve currencies.
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