In recent years, factors such as the rivalry between the United States and China and the sanctions against Russia have led to a global wave of de-dollarization. A recent report by Morgan Stanley points out that the rise of central bank digital currencies (CBDCs), Bitcoin, and stablecoins could undermine the dominance of the US dollar in the global economy.
For nearly a century, the US dollar has held a dominant position in the global financial system and enjoyed the advantage of being the world’s largest reserve currency. Although the US dollar is still the world’s reserve currency, its share in global foreign exchange reserves has declined in the past decade, falling below 70% in 2001.
A recent report titled “Digital De-dollarization” by Wall Street giant Morgan Stanley analyzes the rise of digital assets such as CBDCs, Bitcoin, and stablecoins, and suggests that they could disrupt the long-term dominance of the US dollar in the global economy. The following highlights from the report are summarized below:
The Rise of Digital Currencies
Bitcoin: From an online forum concept to a sovereign reserve asset
The report states that Bitcoin, with its 15-year history, has initiated the movement of digital assets. It is estimated that by 2023, there will be approximately 106 million Bitcoin holders worldwide. Companies like Tesla have already included Bitcoin in their balance sheets, and El Salvador adopting Bitcoin as legal tender and reserve currency marks an important step at the national level. In addition, the recent approval by US regulatory agencies for BlackRock and 10 other asset management companies to offer physically-backed Bitcoin ETFs signals a potential paradigm shift in the global recognition and use of digital assets.
Stablecoins: A killer application of cryptocurrencies?
The global adoption of stablecoins pegged to the US dollar has shown exponential growth. In 2022, they processed nearly $10 trillion in transactions on public blockchains, putting them on par with traditional payment giants like PayPal and Visa. This has prompted major financial service companies to make adjustments. As the importance of US dollar-backed stablecoins continues to increase, they will undoubtedly have a profound impact on the financial sector and may reshape the way funds cross borders. The ongoing development of stablecoins and the increasing acceptance by mainstream financial entities not only do not challenge the dominance of the US dollar but also highlight their potential to significantly change the global financial landscape, effectively strengthening the US dollar’s position as the global dominant currency.
CBDCs: The nationalization and centralization of stablecoins
The rapid adoption of stablecoins has sparked global interest in central bank digital currencies (CBDCs). By mid-2023, more than 111 countries, accounting for over 95% of global GDP, are actively exploring CBDCs, a significant increase from just a few years ago. With wider adoption and technological advancements, CBDCs could establish unified cross-border payment standards, potentially reducing reliance on traditional intermediaries such as SWIFT and the use of dominant currencies like the US dollar. Additionally, CBDCs can facilitate significant innovations in the financial services sector, such as automated payments using smart contracts.
Why is there a global wave of de-dollarization?
In recent years, there have been various reasons for the wave of de-dollarization, including the United States’ unstable economic policies and its frequent use of the US dollar as a weapon for sanctions. Stephen Jen, CEO of asset management company Eurizon SLJ Capital, has shared that the sharp decline in the US dollar’s share in global foreign exchange reserves in 2022 was mainly due to Russia’s $640 billion reserves and half of its gold being frozen by the West after the Russian military invasion of Ukraine. This prompted countries such as Saudi Arabia, China, Iran, and Turkey to begin diversifying their risks. The de-dollarization efforts by China, Russia, and other countries are aimed at countering US hegemony and mitigating the impact of US sanctions. Eurozone countries, on the other hand, seek de-dollarization to promote the international circulation of the euro, enhance their global economic status, and ensure greater financial autonomy.
In terms of specific measures, countries may seek to reduce their reliance on the US dollar in various ways, such as increasing their holdings of gold and other currencies and reducing their US dollar reserves. Countries can also reach agreements to avoid using the US dollar for settling international trade.
With the recent US-China rivalry, Russia facing sanctions after its military actions in Ukraine, and concerns about the impact of US interest rate cycles on assets, the trend of de-dollarization has once again become a hot topic. This article provides a detailed explanation of what de-dollarization is, its impact, and the challenges it poses.
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