There is an emerging belief that regional payment systems may propel de-dollarisation as well as a regional clustering of economic activity. Despite serious technical and geopolitical hurdles, such systems may have the potential to shift the global balance of financial power. There are, however, many reasons to be doubtful. Regional payment systems continue to be plagued by implementation challenges. Evidence also suggests many countries are looking to diversify their currency holdings, rather than de-dollarise.
Predictions about the potential decline of the dollar’s dominance in the global monetary system have been long-standing. Pronouncements about imminent de-dollarisation are often fuelled by the wish of some countries to bring economic activity closer to their borders and wane off US reliance. A shift of this kind would be significant for global financial markets and economies, and it is why discourse on de-dollarisation has featured prominently in OMFIF’s research – including the Global Public Investor and Future of Payments reports. This theme was prominent again at the 2024 Digital money summit, where Douglas Arner (University of Hong Kong) and Elliot Hentov (State Street) spoke about the potential role of repayment systems in diversifying global currency holdings.
Make no mistake, the implications of de-dollarisation are considerable. For the US, it could mean diminished geopolitical leverage and elevated borrowing costs – the consequences of which, both on American hegemony and on its domestic socio-economic affairs, would be extremely damaging.
On the other side, countries seeking alternatives to the dollar may be able to insulate themselves from US-originated shocks, sanctions and events. In theory, this could strengthen countries’ economic sovereignty while decreasing the US’ global influence. As Arner emphasised on a panel at the summit, there have been a ‘significant number of technological developments in the last 15 years… but in the last four years, we have seen a political push to trigger a rethinking of USD’s role in the global economy’. This convergence of technological innovation and shifting geopolitical dynamics is creating fertile ground for the surfacing of regional payment systems and alternative currencies.
Projects and experiments
What do these regional systems look like? As discussed in the 2023 Future of Payments report, projects like mBridge – a cross-border payment platform utilising central bank digital currencies – exemplify the growing interest in establishing financial infrastructure outside of the traditional dollar-centric model. The founding members of mBridge include the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China and the Bank of Thailand.
Other regional payment systems have emerged with the aim to create regional clusters of financial infrastructure, such as the Pan-African Payment and Settlement System, enabling cheap, instant and efficient payments denominated in local currencies. The arrival of these systems as an effective vehicle to reshore economic activity and currency holdings may coalesce with new political thinking on US global power to spur a shift away from the dollar.
Still, there are many reasons to be sceptical that regional payments will spell the decline of the dollar. First, the dollar remains deeply entrenched as the world’s primary reserve currency, accounting for 58% of global reserves. This dwarfs the Chinese renminbi, which sits at just 2.7% of reserves. As Arner commented, the dollar continues to play a role as the global ‘store of value, financial instruments and liquidity’. However, the emergence of the ‘technological capacity’ to create regional payment systems and move away from the dollar, Hentov commented, does not mean that there will be adequate demand for such a shift.
‘Trading in issues for more issues’Â
There remain significant technical and geopolitical barriers to regional payment systems. The dollar, for all of its potential flaws, provides a way for many countries to insulate themselves from those issues. As Arner mentioned, many countries ‘don’t want to trade one dominant instrument, with its issues, for potentially another dominant instrument with a new set of issues’. For instance, regional payments continue to suffer from weak implementation, infrastructure and complex geopolitical obstacles among participatory economies.
This is why the emergence of the technological capacity to drive de-dollarisation does not necessarily mean de-dollarisation will occur. Of course, de-dollarisation has already been underway for years, with the currency’s global share of reserves slipping downward each five-year period. Yet this is caused in large part by the rise of the euro. The euro, Arner remarked, has been ‘remarkably stable, serving as the world’s second reserve currency’. OMFIF research has previously suggested that the greatest threat to the dollar’s continued majority share of global reserves comes not from the renminbi or regional payment systems, but rather from the euro. Unlike many other currencies or regional financial contexts, the euro has excellent liquidity and infrastructure. Still, as Hentov noted, the evidence suggests countries are simply looking primarily to diversify their holdings, rather than replace one dominant currency with another.
Touching on these topics and more, the Digital money summit this year served as a useful vehicle to re-examine the current state of the dollar. And although country exhortations for de-dollarisation are nothing new, the digitalisation of global finance underscores how new innovations have given new life to dollarisation debates.
Julian Jacobs is Senior Economist, Digital Monetary Institute, OMFIF.
