The Bank of England's Mark Carney has made no attempt to hide his displeasure with the current global financial structure. He is as dissatisfied as ever that the U.S. dollar remains the world's reserve and, subsequently, that the U.S. economy is so influential in economics across the globe. He recently proposed - in a speech given before a U.S. audience no less - that crypto be pursued as a means of replacing the USD.
His idea seems a bit radical unless you are a die-hard supporter of digital currencies and what they represent. The biggest barrier to such an idea is getting the rest of the world on board. It is one thing to propose cryptocurrency as a viable replacement for printed bills and minted coins; it is an entirely different matter to suggest countries simply give up their fiat in favor of a universal monetary system.
Carney's ideas are worth consideration if for no other reason than the fact that he is an expert in the field of global economics. But to those who believe that a global cryptocurrency is the solution to what appears to be a broken system, a word of caution: a global economic system devoid of national sovereignty can be just as oppressive as the current system. Going global with a cryptocurrency does not change the reality of political power structures.
The global currency concept
The United Nations currently recognizes 195 sovereign countries across the world. Most of these countries have their own currencies and financial systems. With so many on the table, it is easy to understand why global financial services are so complicated. For one thing, interoperability is not nearly what it could or should be.
Carney and others believe a global digital currency could go a long way toward addressing everything that is wrong with the current system. Let's talk about some of the deficiencies in question, beginning with the interoperability issue.
One of the big advantages of cryptocurrency is its decentralized nature. In theory, eliminating national fiats in favor of a global crypto would immediately solve interoperability issues. Why? Because everyone would be on the same system. Everyone trading with the same digital currency means transactions can be conducted between multiple parties without issue - regardless of national borders.
Though a single, global currency is unlikely, there still is a way to use this concept to address interoperability. That way is to create a variety of stablecoins that could be used as reserve currencies in place of the U.S. dollar. This would allow nations to retain economic sovereignty while still relying on digital currencies for interoperability.
It is easy enough to understand if you imagine every nation on the planet replacing its paper bills and minted coins with a digital currency. Now, assuming all of those digital currencies could be converted to stablecoins on-the-fly, the stablecoins could be used for cross-border transactions. National currencies would remain intact and unaffected.
Effects of the U.S. economy
Another big deficiency of the current system is the amount of influence the U.S. economy has on the rest of the world. Most of that influence is directly related to the status of the U.S. dollar. As the world's reserve currency, all other currencies derive their exchange rates from it. So as the U.S. dollar goes, so does every other fiat.
When you combine the U.S. dollar with the raw power of that country's economic output, you have a system that exerts substantial influence on national economies around the world. We all know that as the U.S. economy goes, so do most other national economies. A strong U.S. economy means strength elsewhere; U.S. economic weakness causes weakness everywhere else.
The thinking is that such influence can be diminished by replacing the U.S. dollar as the world's reserve. How would that work? By decoupling the value of the rest of the world's currencies from the value of the dollar. Breaking the link would force national currencies to be more aligned to national GDPs.
Leveling the playing field
A third deficiency of the current system that cannot be ignored is the unequal playing field that exists in so many places around the world. That inequality can easily be seen by looking at countries like Venezuela and North Korea. Both countries have nearly nonexistent economies as far as average consumers are concerned.
Things are made worse by the fact that people with means in those two countries can protect their wealth by investing it in U.S. dollars and offshore opportunities. Meanwhile, average citizens without means continue to suffer from the effects of high inflation, worthless currency, and a lack of opportunity.
Converting to all cryptocurrency and relying on stablecoins as reserve currencies would not prevent those with means from doing what they do. But it would give market access to those in need of an economic helping hand. They could use the digital currencies provided by their national governments to purchase stablecoins. In theory, those stablecoins would maintain their value irrespective of national economies. That protects wealth. It also allows individuals to convert their stablecoins to international currencies that are worth more.
Of course, all of this can be done under the current system. But do not forget the interoperability issue. While it can be done, the current system makes it extremely difficult - especially for people who do not have access to traditional banking services.
A hybrid system could work
All of what has been discussed thus far leads us to the question of whether or not cryptocurrency is the solution to everything that is broken in the current system. The answer is both 'yes' and 'no'. No, cryptocurrency will not fix what is broken if a global currency were to replace all sovereign fiat currencies. A complete replacement would simply turn national problems into global problems.
On the other hand, cryptocurrency could be part of the solution if it were utilized the right way. It would require coming up with a system that makes digital currencies available to all without threatening the sovereignty of any one nation. It would also require a system in which central banks are either taken completely out the equation or severely limited.
What is broken with the current system is not printed bills and minted coins. These are just tools. The issue is central bank and government influence. Unfortunately, the world will never succeed in getting government out of the equation. Government is an unavoidable part of life. But governments could move to restrict the control central banks exert over currencies and economics.
Stablecoins would be key
Any economic system relying mainly on cryptocurrencies would have to be built on reliable stablecoins. Indeed, stablecoins would be the key. Still, this is the hardest part of realizing Mark Carney's dream. The inherent nature of stablecoins automatically invites interference from governments and central banks.
A stablecoin is not a true cryptocurrency in that its value resides not in itself, but in some other asset that provides backing. A stablecoin can be backed by fiat currencies, securities, other cryptocurrencies, or just about anything with established value.
Making a global cryptocurrency system work would immediately eliminate creating stablecoins backed by other cryptos. That would leave us with fiat currencies or securities. Fiat currencies would be difficult due to their reliance on the U.S. dollar. So really, all we are left with are securities.
We could use a basket of securities consisting of stocks, private and public bonds, and commodities like oil and precious metals. Commodities seem to be the most logical choice in that they will always have value. Paper securities might not.
Stablecoins would stabilize prices
The right stablecoins would stabilize the prices of national cryptocurrencies by providing tangible value. We can actually see evidence of this in the past. All we need do is look at a time when national currencies used to be backed by other assets. For example, both U.S. dollars and British pounds were once backed by gold.
Then president U.S. Richard Nixon decoupled the U.S. dollar from gold in the 1970s because he no longer wanted the nation's economics tied to the value of gold on the open market. He felt it better to allow the U.S. Federal Reserve to stimulate the economy by controlling the money supply.
Other nations have pursued similar strategies within the last 50 years. Such strategies have had their desired effect: taking economic control away from producers and putting it in the hands of central banks and government regulators. This is why the current system is broken. However, tying national cryptocurrencies to stablecoins would theoretically give control back to the people.
Mark Carney and other central bank officials share the mindset of many world leaders who are unhappy with how much influence U.S. economics has on the rest of the world. They believe that cryptocurrency is the solution. They are half right. From what we have discussed in this post, it is clear that cryptocurrency is not THE solution, but part of it. It is up to leaders like Carney to figure out how to make it work and then convince world leaders to get on board.