Will the euro, yuan or bitcoin take its place at the center of global finance? But “they don’t plan on opening their capital accounts anytime soon,” according to Emily Jin, a research assistant at the Center for a New American Security. But these efforts face an array of challenges so great that most experts don’t foresee the yuan succeeding as a reserve currency anytime soon. Bonds, rather than currency, make up the bulk of international central bank reserves, so the lack of true “euro bonds” has constrained the euro’s reserve role. A resurgent U.K. economy could make the pound a player again. After World War II, the U.S. “But trust isn’t just in the protocol, but in the world around it. “But because this kind of breaks the ice, it may mean there’s more in the future.” That wouldn’t simply add assets to the market for reserves – Duffie argues that shared debt issuance would increase European political cohesion, reinforcing the utility of the bonds as stores of value. The European Union announced last October that it would begin the first large-scale issuance of Europe-wide debt to fund pandemic relief.
So, in the last analysis, what’s the dollar’s biggest rival? Finally, what’s the potential for bitcoin to become a worldwide reserve instrument? More recently, some observers argue China’s “digital yuan” project is an attempt to gain a technological edge that would increase the yuan’s share of trade transactions and, in turn, its viability as a reserve. But which of the candidates has the best chance of stealing significant reserve market share from the dollar – along with a share of the power and privilege that come with it? The dollar’s share of global reserves has declined steadily for years. Nations need their reserves to be quite liquid, partly so they’re ready for sudden, big shifts in market conditions – like, say, the coronavirus pandemic, which set off a flurry of U.S. Conversely, bitcoin would be unappealing for official use in nations that already have their own nominally healthy currency, because it would limit their power to control their money supply. “Their nightmare situation is they open an account and they immediately, the next morning, have massive capital outflows.” This could be exacerbated by recent stock market woes, since major outflows would be driven by Chinese investors looking for bigger or more reliable returns overseas.
One major obstacle is a global lack of faith in Chinese political stability and rule of law, which was highlighted recently by a sudden, broad crackdown on financial technology by the ruling Chinese Communist Party. The push for reserve status has included creating offshore bond markets in Hong Kong, a troubled attempt to balance global yuan flows with the Chinese Communist Party’s desire for domestic capital controls. There are very tight controls on the flow of capital out of China because the Communist Party wants domestic capital to be invested within China, whether to build factories for Apple contractors or fund AI development. It’s possible, however unlikely, that China could choose to abandon its current impracticable balancing act and let the yuan float, abandoning its domestic economic priorities. But that’s just based on current conditions. That means major conflicts between member states on monetary policy could lead to governance gridlock or breakdown, which creates risk relative to the more unitary U.S.
Despite a legacy of economic mismanagement by a few member states like Greece and Spain, the eurozone is by and large made up of healthy, well-regulated economies, with a total GDP slightly higher than China’s. Broadly, despite its economic strength, Japan’s financial system still has certain isolationist tendencies rooted in its export-driven postwar rebuilding strategy. As it happened, despite the rise of Europe and Japan, this new currency regime still favored the (now unbacked) U.S. Oil-producing nations trade with a variety of more or less adversarial states, making accepting the customers’ own currency less appealing. Other small and unstable nations could similarly benefit from using a neutral currency. Fundamental geopolitical forces suggest there is a role for a neutral non-state currency. Some have argued that the digital yuan would also increase the yuan’s international appeal through technological innovation – a digital currency may offer speed or other utilitarian advantages over an old-fashioned dollar. Each country’s bonds have their own independent yields, for instance.
