In the disintegrated International Monetary System, cryptocurrency and blockchain can be a huge opportunity and a possible safeguard. Carney, Bank of England governor, suggested that Central bankers can develop a network of national digital currencies to create a new, basket-managed currency. Then the proposal got mostly discussed and several times taken as a possible solution to the imbalance of current system’s dependence on the dollar as the world’s reserve currency. But when taking up a decision a political and technical consideration should be there which make sophistication. But the proposal of cryptocurrency-based fix could attract naysayers.
Curing the global currency system
Using smart contracts of decentralized system, which gives the chance of protection against exchange rate volatility, several countries can make automated escrow agreements. In creation of digital currency interoperability, central bankers can play a vital role but it is expected that an upcoming technology will dismiss foreign exchange risk from international trade except depending on an intermediating currency.
The system can be worked like this:
A speculative importer in Russia could hit an agreement with an exporter from China and consent to a future payment, named in Chinese renminbi, in view of the last’s overall conversion scale with the Russian ruble. Depending on an interoperability protocol that is normally coordinated into each gathering’s favored digital national currency-either in secretly run stablecoins or central bank-issued advanced monetary forms-the two firms could then set up a smart contract that ‘’trustlessly’’ bolts up the required renminbi payment in decentralized escrow. In the event that conveyance and contract satisfaction are affirmed, the payment is discharged to the Chinese exporter.
The role of central bank in this particular case is that it can backstop credit or issue liquidity or guarantee to bank’s trade finance business. They could also be charged with confirming the trustworthiness of the interoperability protocol.
A Fractured System
U.S.-centric global economy will suffer colossally on the off chance a substitute of dollar in the international trade appears. It is because U.S. government bonds and large parts of balance sheet kept in Dollar by companies and they will face a huge impediment. And this reserve currency system is used for protection against exchange rate losses. Carney thinks the hegemony of dollar isn’t tenable as because the system is brittle and he also indicated the trade war between China and U.S. which recently held which caused distortion, political turmoil and economic
If economic crisis appears then the dollar-based system will create predictable vicious cycle. During the emerging market will forbear capital flight as a raising dollar raises the risk of debt defaults in those countries hopefully their central banks will respond by jacking up interest rate to prop up their domestic currencies.
As a result the countervailing effect of massive deficit created which creates artificially low U.S. interest rates which misprices credit risks and fuels bubbles. Actually the dollar system minimizes economic sovereignty and U.S. Federal Reserve Policies mismatch makes it difficult to governments to inquire effective measures to create opportunities for all. After the situation became acrid, Fed reluctantly becomes the world’s lender of last resort and pumping dollars into the world’s bank via their New York subsidiaries.
Fierce or Driven change?
The above mentioned solution could be managed for a glossy alteration. The central bank should respond to Carney’s call and work together accordingly and in this way they can coordinate the consecutive introduction of digital currencies, manage access and apply differential interest rates to discourage an exodus from shaky banks. Charging of IMF with asking for a global standard for cross-chain interoperability could also be charged by them.