What does the decline in the U.S. dollar’s global role mean for cryptocurrencies?

Abstract

Cryptocurrencies have been at the forefront of a number of newsworthy events so far in 2021. One of those stories suggests that Bitcoin might be well-positioned to replace the U.S. dollar as the most popular global reserve currency. This article reviews what it means to be a reserve currency, as well as the costs and benefits for the U.S. to have its dollar serve as the medium of exchange for most international commercial transactions and to have it held by so many governments, central banks, and financial institutions. It then evaluates whether recent events that weaken the dollar’s influence and popularity create a path for Bitcoin or other cryptoassets to step into this role. In addition to Bitcoin, private stablecoins and central bank digital currencies (CBDCs) will be evaluated before concluding that, while the U.S. dollar might eventually be replaced as the most popular reserve currency, the time for that development has not yet arrived. Thus, the current, relatively cautious approach taken by the U.S. Federal Reserve with regard to a U.S. CBDC is probably the best option.

Keywords: bitcoin, cryptocurrencies, stablecoins, CBDC, crypto, currencies

JEL Classification: k12, k22, 038, e40,e42,e49,