Only several decades ago, the share of the US dollar in world currency reserves was over 70%. Today, this share is substantially lower, in a trend that will only strengthen in the future. The US currency may have to stand against most surprising rivals. What will end the age of the dollar and will there be one new reserve currency or a diversified model – and, most importantly, what prevents us from using cryptocurrency for reserves? Artem Genkin, Doctor of Economics, Professor, President of the NPO Center for Protection of Bank Clients and Investors, answered these questions in his talk at a research workshop on digital finance at the Institute of Economics of the Russian Academy of Sciences.
Pushing the dollar aside
The US currency has been losing its positions for several years now, Artem Genkin notes. Its share in the world reserves stands at around 60% and it is in a steady decline. In 2022, this dedollarization of the world reserves actually followed a risky trajectory as the share of the US dollar was falling ten times faster than ever in the past 20 years. Nine out of 15 largest national debt holders were selling it.
Competition between currencies is not the only reason. The growing US national debt was among the factors affecting trust in the currency. In January 2024, the debt exceeded $34 trillion for the first time, showing an increase by more than 40% total in the past four years.
“In 2023 alone, the national debt grew by $4 trillion. Since 1945, the United States has raised its national debt threshold more than 100 times,” Artem Genkin comments.
The security of the US dollar is also raising doubts as this currency is not tied to gold. Experts claim that it is secured by the power of the US Navy, the country’s safe haven status, the Hollywood film industry and even the dollar’s mysterious gravitational pool.
Challenge from the East
National currencies are increasingly competing with the US dollar in the global market. Iran, China and India have been trying to bypass the dollar in their bilateral clearing trade, whether it is bi-currency or multi-currency trade. The possibility of Russia signing clearing agreements with CIS, SCO, Asian and African countries has been under discussion since 2014. In March 2022, the Russian President issued an executive order prohibiting payments in any currency but the Russian ruble in gas supply contracts with unfriendly countries. Artem Genkin predicts that the number of such precedents will be growing, especially as integration associations strengthen their role.
The Chinese currency has become a favored option for mutual settlements between the countries.
“As of April 2023, the Chinese yuan has become the fifth most popular currency in the world for trade volume, rising from the 35th place since 2001,” Artem Genkin notes.
The Cross-Border Interbank Payment System (CIPS) has made transactions easier. In 2024, the amount of daily transfers via the CIPS has reached $1.4 trillion. UnionPay is also playing an important role as an international card payment system.
“In 2022, the share of UnionPay debit card transactions reached 40.03% while the total worth of transactions reached $16 trillion, or more than Visa transactions,” Artem Genkin comments.
The Chinese yuan is even becoming a reserve currency for many countries. As of April 2022, 63% of the world’s central banks have yuan reserves, as opposed to 40% in 2018. At the end of 2022, the yuan ranked fifth among the major reserve currencies.
Digital competitors
Digital monetary tools, in particular cryptocurrencies, are also challenging the US dollar. The total capitalization of the crypto market is already around $1.68 trillion, according to CoinMarketСap. NFTs, metaverses and stablecoins are among the most rapidly growing submarkets. As of January 17, 2024, their worth reached $35 billion, $22 billion and $134 billion, respectively.
Central bank digital currencies (CBDC) are also strengthening their positions, the digital yuan standing more firmly. Eighteen months after the launch of the pilot yuan project, 120 million digital wallets were opened and more than 950 million transactions were performed using the digital yuan.
Overall, CBDC are turning into a counter-balance for bigtech companies that are trying to launch their own digital currencies. The latter creates a threat of initially non-financial ecosystems oligopolizing the payment market.
Competition with the global payment systems is also driving CBDC development. In Europe, they are competing with Visa and Mastercard, and in China with Alipay and WeChat.
Long-distance run
Which of the monetary instruments competing with the US dollars has more chances to win? It is difficult to single out one definite world leader.
Despite the growing weight of the Chinese currency, the US dollar and the euro still dominate in global payments, their share being close to 75% while the yuan only has 2.3%, Artem Genkin notes.
“The remaining distance to cover is still too long. The yuan has clear prospects of becoming the second largest currency in the world but it will not share the first place. Moreover, leadership would undermine the current model of the Chinese economy as it will create risks for labor-intensive and low-gain industries and also create challenges for exports,” the expert clarifies.
Private cryptocurrencies come with a range of inherent risks, including issues related to speed and scalability. Moreover, the acceptance of these tools by regulators and traditional financial market institutions poses challenges. Additionally, the volatility of digital currencies should not be overlooked.
“In 2021, Elon Musk influenced the Bitcoin rate by 13% through just two tweets in a month and a half. Do we desire the world’s reserve currency to exhibit such characteristics, fluctuating based on posts on social networks?” Artem Genkin says.
However, this doesn’t imply that the dynamics of power won’t shift in the future. While a range of private cryptocurrencies is unlikely to displace the dollar from the market, they can help partially counteract the inflationary impact of the dollar surplus. This trend is already evident: the maximum capitalization of the crypto market reached $2.9 trillion in November 2021, comparable to the average annual growth rate of US national debt ($2.2 trillion in 2019–2023) and the volume of circulating cash dollars worldwide.
The stablecoin market is also poised for a new phase of development. Currently, over 99% of stablecoins are pegged to the dollar, but this might change.
“We can expect more stablecoins pegged to other currencies, such as dirhams or rupees, as well as baskets of commodities and resource assets, including metals or kilowatt-hours of energy,” Artem Genkin notes.
At the same time, the path to currency dominance in the global market for these “newcomers” will not be straightforward.
“I believe the struggle against the ‘dollar world’ will persist, involving central bank digital currencies, stablecoins, and other monetary instruments competing for the role of a global reserve currency,” Artem Genkin predicts.
In the future, one of the private cryptocurrencies or a basket of them, including both leading cryptocurrencies and stablecoins, could assume a dominant role in global settlements. Transactions with these assets are convenient, relatively inexpensive, and secure. However, the dollar and yuan are likely to remain prominent as reserve currencies in the coming years.
On the national markets, the dynamics of currency dominance can shift more rapidly. According to a forecast from the dGen analytical center, in the next 10 years, 3 to 5 countries may fully replace their national currencies with CBDCs. Additionally, the euro faces the risk of being displaced by the digital yuan if a digital counterpart to the single European currency does not enter the market by 2025.