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Bitcoin, CBDCs Poised to Erode Dollar’s Dominance, Says Morgan Stanley

Last Updated January 16, 2024 11:00 AM
Teuta Franjkovic
Last Updated January 16, 2024 11:00 AM

Key Takeaways

  • The US dollar’s dominance in global finance is under threat due to the growing use of crypto and CBDCs.
  • The rise of cryptocurrencies could diminish the reliance on the USD for international transactions and central reserves.
  • Central banks are exploring the implementation of CBDCs, which could further challenge the dollar’s dominance.

Morgan Stanley, a leading Wall Street firm, has recently analyzed the potential impact of Central Bank Digital Currencies (CBDCs) and digital assets such as Bitcoin and stablecoins on the global financial landscape.

In their report titled “Digital (De)Dollarization?” , the lender discusses the significant role the US dollar has historically played in global finance and considers the effect digital currencies and Central Bank Digital Currencies (CBDCs) could have on it.

Shift in Global Monetary Power

Amid the backdrop of a global economy where the United States contributes about a quarter of the global GDP , the dollar constitutes nearly 60% of the world’s foreign exchange reserves. However, recent developments have cast a spotlight on its dominant status, leading to increasing scrutiny. Factors such as the United States’ expanding twin deficits  and the strategic imposition of economic sanctions have spurred countries to explore alternatives.

There are currently attempts to challenge the dollar’s supremacy coming from the European Union  and China . The EU has been actively working to strengthen the role of the euro in the global economy. It has focused on its use in energy and commodity transactions. China, on the other hand, is pushing forward the international presence of the yuan. Beijing is using its Cross-Border Interbank Payment System as a counterbalance to the traditional dollar-centric payment systems.

In parallel, other countries have formed the BRICS organization , a collective focused on developing trade mechanisms that circumvent the dollar. Russia has shown interest in adopting private digital currencies for certain types of cross-border transactions.

The report further highlights that the rise of digital currencies, including CBDCs, poses a formidable challenge to the dollar’s longstanding hegemony in international finance. These assets offer the prospect of enhanced efficiency, transparency, and accessibility in financial transactions. This could, potentially, reduce reliance on both conventional banking systems and the dollar in both international trade and foreign exchange reserves.

Digital Currency Revolution: A New Era in Global Finance?

Morgan Stanley’s report  delves into the impact of cryptocurrency and CBDC on international finance. Their increasing acceptance and usage could pave the way for viable alternatives to traditional fiat currencies. This could, if it were to happen, trigger a shift in the global financial landscape.

This emerging trend could diminish the reliance on the dollar for international transactions and central bank reserves. The report underscores Bitcoin’s journey from a specialized online concept to a globally recognized asset. With 106 million owners worldwide, Bitcoin’s decentralized nature and limited supply have catapulted it from a niche interest to a significant player on the global stage. Its adoption by countries like El Salvador and the Central African Republic as legal tender could mark a pivotal moment in national financial strategies.

The report also talks about the growth of stablecoins, highlighting their $10 trillion transaction volume  in 2022. Their increasing popularity as a payment method is attributed to the advantages they offer. These include 24/7 accessibility and instantaneous settlement. The integration of stablecoins into the payment systems of major corporations like Visa  and PayPal demonstrates their potential significance within global finance.

The Emerging Challenge of CBDCs to the Dollar’s Global Supremacy

The report  highlights the swift growth of CBDCs and their potential to disrupt the dominance of the dollar. Currently, more than 100 countries are actively exploring the implementation of digital counterparts to their national currencies.

The report showcases developments such as Brazil’s DREX , illustrating the potential of CBDCs to foster more efficient and inclusive financial transactions. These digital currencies could redefine the landscape of global finance, especially in the areas of cross-border payments. Morgan Stanley suggests  the adoption of CBDCs could streamline these, reducing the current reliance on traditional financial intermediaries like SWIFT, and, as a result, the dominance of currencies like the dollar.

One example in the report is the mBridge project , which involves several central banks working together. This project demonstrates how CBDCs could enable efficient cross-border settlements through the use of smart contracts.

Morgan Stanley’s analysis indicates a future where both CBDCs and private digital currencies could emerge as formidable alternatives to traditional cash and fiat currencies . This paradigm shift, driven by digital innovation and changing geopolitical dynamics, could gradually diminish the dollar’s pivotal role in international finance, marking a new era in the global monetary system.

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