The US dollar will lose its status as the world’s leading currency within the next decades. About half of the global population consider this prognosis plausible, according to a Gallup poll. The US currency is indeed giving up its positions: although about 60% of the world currency reserves are still kept in dollars, this share was significantly higher only a few decades ago. Alternatives include such reserve currencies as euro, the British pound, the Japanese yen and the Chinese yuan. US Secretary of the Treasury Janet Yellen openly admitted that Russia and China are motivated to create a different system that would help them avoid using the dollar.
For trans-border payments, the US dollar may be substituted by not just another currency, but a whole new form of money, central bank digital currencies (CBDC). Their appeal is in the possibility of cutting costs by removing intermediaries, and in the speed of transactions. Global economy participants consider CBDC as a way to neutralize geopolitical risks related to dollar transactions.
Artem Genkin, Doctor of Economics and President of ANO Center of Protection of Bank Clients and Investors, spoke about the prospects and challenges of using CBDC during a public lecture, From Gesell to Central Bank Digital Currencies: Looking for Best Programmable Money. The lecture took place at the Financial University under the Government of the Russian Federation.
Challenges from the East
The digital yuan, or e-CNY, is the main candidate to become an alternative currency for international trade deals. At least in China, its prospects are considered quite realistic.
Thus, the role of the national digital currency in foreign trade settlements was noted by Director of the Digital Currency Research Institute at the People’s Bank of China Mu Changchun. The digital yuan is also seen as a functional alternative to the dollar-based payment system which will allow for minimizing sanctions risks and easing the integration with the global currency markets, Artem Genkin says.
The potential of the digital yuan is to a large extent based on the quick and mass adoption of it in the country. Thus, it took some five years to launch the project: it was first mentioned at the state level in 2014, and in 2019, the e-CNY prototype was ready.
Its popularity keeps growing: as of the end of 2021, users opened over 260 million digital wallets; the total worth of e-CNY transactions reached 87.5 billion, and counting.
On the global stage, the digital yuan is also considered an alternative to the global payment system. For instance, it was noted at a hearing at the House of Lords that the trend to use central banks’ digital currencies might undermine the sanction potential of the US dollar.
Digital parade
In the long run, the dollar might be challenged not only by the digital rivals from China.
“According to Visual Capitalist, as of August 2022, in 27% of 109 countries, the central bank digital currency project was under development, 14% began pilot testing and 9% of the countries began the implementation,” Artem Genkin says.
Today, not only small island states whose transition to CBDC will unlikely weaken the position of the US dollar are joining the project. In 2018, the Sovereign national cryptocurrency was launched by the Marshall Islands, in 2020, Central Bank of the Bahamas issued the Sand Dollar. Nigeria, Africa’s biggest country, also developed its own digital currency, eNaira. Sweden is pilot testing its cryptocurrency. In December 2022, the digital rupee was launched in India as part of a pilot project. Before that, in October 2022, Kazakhstan successfully tested the technological platform of the digital tenge. It is possible that this fall, the European Union will begin the launch of the digital euro.
Rival from Russia
The digital ruble can compete with the traditional currencies in cross-border settlements. According to the Bank of Russia Governor Elvira Nabiullina, the regulator is ready to test pilot the digital ruble. So far, it is used in small transactions between a limited number of clients, but the digital currency will later be used by common users and business.
In the future, the digital ruble can be used in cross-border transactions, the Central Bank says. Technically, the process might be regulated by bilateral agreements on the integration of national digital currency platforms (each will provide the conversion and transfer between countries in accordance with established rules). Another model suggests launching a common integration platform which will assist payments between the digital currency platforms for the countries that are connected to it.
In particular, the digital ruble could become an alternative to the dollar, such as for settlements with friendly countries. It could also be potentially used by member states of international associations, including BRICS.
The transition to CBDC settlements will depend on solving several basic organizational issues. For instance, regulators in different countries currently lack correspondent accounts for mutual transactions; such processes will also require an advanced technological infrastructure. The issues of organizing CBDC interoperability between two central banks as well as of the turnover of received foreign digital currency are to be considered as well.
Accepting digital ruble
The prospects for the use of the digital ruble will depend on mass consumers and businessesэ readiness to utilize this tool. The digital format is unlikely to become an obstacle in this regard: between 2014 and 2022, Russia saw the share of its non-cash transactions increasing from 26% to 78%, Artem Genkin notes. Also, the implementation is facilitated by Visa and MasterCard payment systems pulling out of Russia as well as Apple Pay and Google Pay services not available anymore. However, the process may take a while.
“We should ensure the technological neutrality of choosing the digital ruble, cash and non-cash money, and avoid multiple exchange rates, discrimination of payers by merchants, and denials of service, as well as hidden and explicit charges,” Artem Genkin emphasizes.
A wider use of the tool could be facilitated through a targeted outreach campaign which would involve PR and GR technologies, Artem Genkin says, adding that financial incentives for early implementation, tax deductions and cost recovery loans could serve as an effective stimulus for business.
Thinking long-term
How fast will the currency substitution process be? The Roscongress Foundation estimates that a currency that could compete with the dollar and the euro may appear no earlier than 2035–2040. According to the foundation’s report, Currency Unions: An Alternative to a Unipolar World, the dollar has been weakening over the past 20 years – but the rate of decline is slow.
Yet, CBDCs could replace the dollar in settlements, at least in large regions and at international associations. The prospects of ousting traditional national currencies for settlements are seen as quite realistic. According to the forecasts by the Dutch non-profit analytical center dGen, about 3-5 countries are expected to fully replace their national currencies with CBDCs until 2030. The European currency will face the greatest risk; analysts do not rule out the possibility for the euro to be replaced by the digital yuan – of course, unless Europe implements its own CBDC, such as the digital euro. The prospects can drastically change with the development of a digital dollar among CBDCs. However, currently the issue remains open, with no decision made so far as regards a possible launch of the tool.
The United States has so far shown a balanced yet hesitant approach towards CBDC development.