Stablecoins have the potential to temper the systemic threats posed by the United States dollar’s domination of global foreign currency reserves, according to an opinion piece published by the World Economic Forum (WEF). The argument was made by the Fusion Foundation’s John Liu and Lapa Capital’s Peter Lyons in an article published on the WEF’s Agenda on Nov. 26.
The Fusion Foundation is a non-profit organization focused on developing blockchain infrastructure for decentralized global finance; Lapa Capital is a tech-focused investment firm headquartered in New York.
IMF: USD accounts for 62% of all central bank foreign reserves
Liu and Lyons advocate the wide-ranging potential of stablecoins to underpin a more “sustainable, inclusive, and resilient global system” across trade and investment, banking and payments.
Until today, the authors note, the U.S. dollar continues to account for 62% of all foreign reserves held by central banks, as IMF data for Q1 2019 has demonstrated. Dollar hegemony perpetuates the systemic threats forcibly evinced in the 2008 financial crisis, when global investors flocked to dollar-denominated safe-haven assets, generating a precipitous global liquidity crunch.
Even overlooking such acute, systemic risks, the authors note that the lock-up of USD reserves in U.S. government bonds worldwide is exacerbating a skewed global economy, keeping U.S. interest rates low and driving the U.S. government’s debt and GDP “to levels not seen since the Second World War.”
As the authors note, the Bank of England’s governor Mark Carney has argued that a diversified digital currency — one that would be only partially weighted in USD, alongside the euro, the British pound and the yen — could reduce over-reliance on the dollar globally and function as a new international reserve currency.