China, Crypto Among Threats to USD Status as Top World Reserve Currency

A job opening posted by the U.S. Office of the Director of National Intelligence has given a hint at possible threats to the USD’s domineering status as the most used world reserve currency. They include the mention of China and India for their large growing economies that could compete with U.S. economic growth, and the likely emergence of a global cryptocurrency or a national digital currency that could undermine the U.S. dollar based on many cryptocurrency enthusiasts’ belief.

The vacancy post states that should either scenarios – a global cryptocurrency or a national digital currency or others – come to pass, the U.S. stands to lose both its status in the world and its global authorities. Hence their being on the look out for candidates that would help “prepare for scenarios that threaten to undermine the U.S. dollar as the world reserve currency” and determine how those scenarios could be overcome to protect its status in the global economy.

The rapid proliferation of cryptocurrencies and new technologies is the latest addition to the factors seeking to challenge the U.S. dominance of the global economic order and changing the competitive environment to the dollar’s position, according to a recent National Bureau of Asia Research commentary. It builds on other factors like the emergence of rival currencies like the euro, the rise of China as a global economic superpower; and the recent geopolitical developments that make some countries “seem intent on constructing alternative infrastructures to mute the dollar’s dominance…”.

Bitcoin emerged as a leading global cryptocurrency about a decade ago and has been running ever since on a roller coaster basis in comparison to major fiat currencies. The strength and threats of its main features to global financial and economic activities have always been a topic of discussion for most governments. There have been individual country approaches like in the U.S. At some point, top economies including the U.S., European Union countries and China, which all have currencies deemed eligible for world reserve (Chinese yuan got added to the IMF Special Drawing Rights basket in 2016), have worked on collective regulatory efforts to stem the likely menace of money laundering, terrorism funding among others through the use of cryptocurrencies like Bitcoin.

Even with such financial regulatory moves like amendments to KYC/AML rules still ongoing for cryptocurrency-related activities, the USD’s dominance of global reserve is still high. As at Q3 2019, no country’s currency has come as close to the U.S. dollar as a reserve currency according to IMF data. It sits comfortably at a 61.7% allocation (a rise from ~50% as at 2015) with the euro trailing behind at ~20%. Others are Japanese yen (5.6%), British pound (4.4%) and Chinese yuan (2%). It points at a lower chance for Bitcoin, or any other global cryptocurrency, overthrowing the USD in this regard soon.

The second scenario is more likely to play out though. The U.S. dollar’s share of global reserve currency can only decline when central banks other than the U.S. Federal Reserve proportionately reduce their dollar-denominated assets and add assets denominated in other currencies. It is plausible for China’s proposed digital currency to spread widely across many nations of the world particularly with its Belt and Road Initiative which seeks to spread Beijing’s infrastructure development and investments across about 70 countries in Asia, Europe, and Africa. A national digital currency issued and used to power this initiative could be a win for China as USD assets get dropped for yuan.

With determination sought for how the USD could lose its status as the world reserve currency; why it is most likely; in what timeframe it could unfold; and the impact of status loss on the U.S., its economy, and national security, candidates for the advertised positions should come up with the right scenarios. They are expected to leverage recent breakthroughs in applied statistics, artificial intelligence, and deep learning to help the U.S. “prepare to identify potential “black swan” events that could revolutionize the financial playing field” in ways not yet understood and understand root causes and driving factors that are particularly sensitive to certain global or technical events.

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