PROPONENTS of de-dollarization might resent America’s exorbitant privilege all they want. But what can they do about it?
Analysts usually trace the US currency’s hegemony to its outsized use in international commerce. Even a decade after China eclipsed the US as the world’s largest goods-trading nation, that dominance doesn’t appear to be fading. The much-awaited petroyuan has so far been just a myth, even though some dollar-starved importers like Pakistan are keen to pay for Russian crude in the Chinese currency.
An even bigger moat may be the greenback’s role in fundraising. It will take the People’s Republic a long time to match the depth, liquidity, and openness of the dollar-denominated capital market in which firms and banks borrow and hedge their risks. A proposed common currency for the so-called BRICS grouping of Brazil, Russia, India, China, and South Africa may flounder for the same reason.
That still leaves the de-dollarization camp with a low-hanging fruit, one they can pluck with digital technologies.
When it comes to carrying value across illiquid currency corridors, the dollar is a sturdy mule. That’s a big part of the reason it ends up on one side of the trade in nearly 90% of foreign-exchange trades. Dealers often find it more efficient to use the dollar as the go-between. Funds are first converted into the US currency, and then reconverted into whatever the payee’s bank will accept: euros, yen, Swiss francs, or something else. This preferred vehicle-currency status accounts for 40% of the dollar’s $6.6 trillion-per-day turnover.
This is what keeps Brazil’s President Luiz Inacio Lula da Silva awake at night. Bypassing the need for dollars as a middleman is also the vision outlined by Southeast Asian nations’ finance ministers and central bank governors in Bali last year. They want payments transacted in Thailand using an Indonesian app to be directly exchanged between rupiah and baht.
Five central banks in the region — Indonesia, Malaysia, the Philippines, Singapore, and Thailand — are seeking to achieve this by syncing their domestic, smartphone-based, instant-payment systems under a protocol known as Nexus. This will solve some of the existing issues related to slow transfers. The hefty fees charged by banks for cross-border transactions will also fall, or at least become more transparent to customers.
However, the problem of foreign-exchange conversion will remain. That’s because the Singapore dollar is the only Southeast Asian currency eligible for settlement by CLS Group Holdings AG. Jointly owned by many of the world’s largest banks, CLS lines up payments so that neither party in a trade is left holding a claim after it has discharged its obligations.
Settlement risk compels banks to set aside capital to cover it. That has a charge. Therefore, for an illiquid bilateral payments corridor in Southeast Asia, both the Singapore dollar and the US dollar — or at least one of them — will still end up as vehicles because they help cut costs. Nexus won’t change this. No matter how hard the BRICS push their rival IOU, the greenback isn’t going away.
One way to edit it out will be to use blockchain technology to eliminate settlement risks. If all countries put their central bank digital currencies, or CBDCs, on a common platform, it would be easy to ensure “atomicity:” Transfers across borders will either succeed in their entirety, or fail altogether. Money won’t get stuck somewhere in the long chain of banks between the sender and the recipient. In payment journeys where the dollar is just a vehicle — and not the origin or the destination — it can be ditched. Tokenization will provide safety to intermediaries.
A multicurrency CBDC network could eliminate a big chunk of the $120 billion-a-year in transaction costs. However, the enormous coordination and trust it will require to first create such a global public good, and then agree on its ownership and governance, makes the idea a non-starter. Especially when the same blockchain technology can be more feasibly employed to preserve the dollar’s exceptionalism.
In a recent experiment with the Singapore central bank, the New York Federal Reserve showed that it could keep the dollar in play even in the blockchain world. A vehicle currency managed to deliver up to 47 payments in one second in an illiquid corridor of two other national units. Distributed ledgers that didn’t share a common technology were able to participate without requiring a central party. What’s more, the Fed didn’t need a retail digital dollar to do this. A wholesale token, available only to banks, was enough.
Experiments like the awkwardly named Project Cedar Phase II x Ubin+ show one thing: The Fed may be taking its time to decide whether to issue a retail CBDC, but it’s not wasting the interlude. The e-CNY, now available via popular WeChat Pay and Alipay wallets to 1 billion retail users, is gaining acceptance at stores within China. Sooner or later, the online yuan will go global.
Should the BRICS nations get serious about a single currency for trade, they may, too, offer a digital version. But why would any of these alternatives get a second look from intermediaries if a wholesale token of the US currency is available to carry the weight of payments across illiquid corridors? The dollar is a mule with very strong legs.
BLOOMBERG OPINION
