What does one do with a relatively uninteresting financial thingamabob in need of some spicing up? Bloomberg's Matt Levine has had the answer for a while now: Just add blockchain.[i]
This time, the widely-hyped but fiendishly-difficult-to-describe fintech innovation has caught the eye of the International Monetary Fund, which hopes to transform their (boring!) "special drawing rights" (SDRs) -- the accounting unit for the IMF's reserve assets and bailout funding -- into a hip, relevant and millennial-friendly digital currency. Voila! IMFcoin.
But while technophiles may be jazzed about this, some view it as the latest assault on the dollar's status as the world's preeminent currency. It all sort of reminds us of the brief "Fedcoin" hoopla after a Fed economist's mere suggestion that central bank digital currency could be useful. Though the prospect of innovation is interesting, speculating about endgames -- for cryptos, the IMF and the dollar -- seems pointless for now. Markets don't discount far-future hypotheticals and, in our view, the dollar losing reserve currency status was always a false fear.
As the SDRs presently stand, putting them on blockchain and turning it into a cryptocurrency would be window dressing. The SDR isn't a currency. It is a claim on five major currencies: US dollar (41.7%), euro (30.9%), Chinese renminbi (10.9%), Japanese yen (8.3%) and British pound (8.1%). Countries that hold SDRs simply have the right to swap them for the underlying currencies.
Their original purpose was to give countries an alternative to gold and U.S. dollars in international transactions -- a way of supporting foreign trade.[ii] These days, they feature mostly in IMF bailout funding and a small part of countries' forex reserves. SDRs in circulation amount to about $285 billion, which is tiny compared to major global central bank reserves that total north of $14 trillion.[iii] Turning it all crypto doesn't seem like much of a change. SDRs are already an electronic accounting unit -- one that includes dollars. Putting it on a blockchain would just turn it into a different sort of electronic accounting unit ... that would presumably include dollars. The value of a global reserve currency basket isn't the basket -- weaved with blockchain or not -- it's the currencies in it.
The debate seems less about cryptocoinage and more about the role the IMF should play. Namely: Should the SDR stop being an accounting unit and start being an actual currency? Should it no longer be a currency basket? Should it be the primary means of exchange in global trade? Should the IMF be able to create IMFcoins out of thin air, effectively acting as an international central bank?[iv]
These questions likely take years, if not decades, to iron out. And it would also probably require changes to the IMF's charter, which the U.S. has a de-facto veto over. It took decades for the euro to launch, and that involved only eight nations originally. If several dozen countries can't even agree on things like limiting tariffs in international trade talks, it is difficult to envision them agreeing on rewriting the world's monetary system in short order.
IMFcoin speculation is just another iteration of dollar-losing-reserve-currency-status fears. The same fears surfaced in 2009 and 2010, when some technocrats claimed reducing the dollar's role may benefit Emerging Markets trade. From this seemingly benign suggestion, pundits constructed ghost stories that presume the U.S. benefits from artificially low borrowing rates as a result of the dollar's status.
Many feared the IMF adding the Chinese renminbi to SDRs would disrupt this, until that came and went without a ripple. Similar fears resurge now and then when pundits float yuan-denominated commodity trading (because China buys so much).
But these fears rest on a flimsy premise: That only the U.S. dollar's reserve currency status keeps foreign creditors lending to America. This is hooey. No one is forcing the rest of the world to use dollars. They're free to switch any time. They just don't have much need or inclination.
The U.S. has the world's deepest, most liquid capital markets. Dollars are broadly accepted, easily convertible and generally stable. There are also a heckuva lot of them. And, U.S. debt is backed by a powerhouse economy, open markets and rule of law. We'd also add that the U.S. gets nothing from being the world's preferred international trade currency.
The Treasury doesn't collect fees when the world trades oil in dollars. Never mind that plenty of other countries do just fine without having globe-spanning reserve currencies. It isn't like the U.K. has flatlined since the world moved on from the pound sterling in the mid-20th century. Japan and Switzerland get by just fine (with super-low funding rates), even though the yen and franc aren't widely used internationally.
Markets discount probabilities over the foreseeable future, not long-term speculative questions about global reserve currencies or whether they're held in crypto-baskets. Interesting to think about, perhaps, but nothing to worry over.
[i] Or as it's also known, "blockhain blockchain blockchain."
[ii] But all that went out the window when Nixon suspended U.S. dollar-gold convertibility. Dollar-denominated trade settlement subsequently took over.
[iii] Adding up Fed, ECB, BoJ, BoE and SNB balance sheets, in U.S. dollars. That isn't even including the PBoC's $5.2 trillion.
[iv] John Maynard Keynes originally envisioned the IMF as a global central bank, but this was never implemented. Instead of Keynes' plan, U.S. Treasury's Harry Dexter White won the day at Bretton Woods and set up the IMF to promote global financial stability. It hasn't always been successful, of course, by its own admission.