Central Bank Digital Currencies and The Global Financial System: The Dollar Dethroned?

Abstract

The US derives enormous economic benefits from issuing the dominant global currency. This exorbitant privilege has been put at risk by the combination of the 2022 sanctions against Russia and new technological developments, specifically Central Bank Digital Currencies. CBDCs promise faster, cheaper, and better ways to settle international trade and financial transactions. CBDCs are coming and are likely to underpin major changes in the global financial system. We analyse the potential impacts of CBDCs which range from entrenching US dollar dominance, to fragmenting the system into two or more currency blocs, to enabling a multipolar system characterised by cooperation not competition. The first two impacts are the most likely and are those for which policymakers need to begin now to prepare.

Keywords: Central Bank Digital Currencies, Sovereign Digital Currencies, Digital Yuan, e-CNY, Digital Dollar, SWIFT, CHIPS, Payments, US-China, Sanctions, Financial Technology, Currency Competition, Fragmentation