Figure 5: Composition of foreign exchange reserves
110.0
82.50
55.00
27.50
0.0
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Shares of US dollars
Shares of Swiss francs
Shares of other currencies
Shares of Pound sterling
Shares of Japanese yen
Shares of Euros
Shares of Canadian dollars
Shares of Netherlands guilders
Shares of ECUs
Shares of Deutsche mark
Shares of French francs
Shares of Australian dollars
Source: IMF52
There has been talk of replacing the US dollar with special drawing rights (SDR) created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves. The SDR’s value is based on a basket of four international currencies – the US dollar, pound sterling, euro and yen – and can be exchanged for freely usable currencies. Typically, the funds the IMF lends to countries are denominated in SDRs. China, eager to take the yuan global, wants the IMF’s five-yearly review of the basket of currencies to include the yuan, which requires formal recognition of the yuan as a reserve currency. For many stakeholders, the SDR seems an ideal candidate for a global reserve, particularly once its basket of currencies contains the yuan53.
The Future of Exchanging Value Cryptocurrencies and the trust economy 51
The SDR was created to support the Bretton Woods fixed The trust dynamics that limit the adoption of
exchange rate system. Bretton Woods requires
cryptocurrencies within a closed community also limit
participants to hold official reserves to purchase their adoption across communities. Money is a technology for domestic currencies in foreign exchange markets to
resolving obligations between individuals who don’t know, maintain exchange rates. A new reserve asset was
or don’t trust, each other and for whom barter is too
required as the supply of two key reserve assets of the awkward. The strongest possible driver for national
time – gold and the US dollar – proved inadequate for
adoption of a cryptocurrency is for the national
supporting the expansion of world trade and financial
government to mandate that taxes be paid in the
development. One of the hopes for the SDR was that it
cryptocurrency. Similarly, the strongest possible driver for would function as a reserve currency, though the SDR is global adoption of a global reserve cryptocurrency would neither a currency nor a claim on the IMF. Instead, it is a be global institutions that can force their will on most potential claim on the freely usable currencies of the cross-border trade, mandating its use. Otherwise,
IMF’s member countries. One school of thought when the stateless cryptocurrencies will continue to play a niche IMF was established 70 years ago was that it would be
role in the global economy, just as they do in national the custodian of a global reserve currency. However,
economies. Individuals and institutions will still find it more SDR was overtaken by history when the Bretton Woods
convenient to conduct their business in one of the
system collapsed and the major currencies shifted to
currencies at either end of the transaction (which, as floating exchange rates, facilitated by the growth in
we’ve already stated, is most likely to be a national fiat international capital markets that simplified borrowing by currency), in a trusted third currency (which, by sheer creditworthy governments.
size, may be the global reserve currency) or in a weighted basket of currencies as a risk management strategy to
The opposite point of view is that adopting SDR as a
limit exposure to any single currency.
reserve currency would not change the fundamentals
of the current status quo as it is simply an aggregate of International inter-currency exchanges may travel over fiat currencies and would lose value like a fiat currency peer-to-peer technology platforms based on (or inspired if the nations in the basket print currency with
by) the technologies that underpin cryptocurrencies such abandon. It could also be considered a risk
as Bitcoin or XRP, but value will continue to be stored and management tool as it allows holders to spread their
exchanged in conventional sovereign currencies.
exposure across multiple reserve currencies,
something many organisations may choose to do
directly as it enables them to tune the weightings of the basket of currencies to more closely meet their needs.
If the global reserve currency is to be stateless, it
also needs to be independent. This means it would
need to be supported by enforceable taxation rights
across participating countries, or valued against a
single commodity (gold, for example) or a basket of
commodities such as gold, oil, grain, etc. owned by
an issuing entity. A third option, enabled by our
increasingly globalised and virtual world, is to adopt a stateless cryptocurrency.
