Wall Street giant Morgan Stanley believes that the rise of central bank digital currencies (CBDCs) and digital assets such as Bitcoin and stablecoins could disrupt the US dollar’s long-standing dominance in the global economy.
The lender conducted this analysis in a recent report titled “Digital Dollarization?” – which highlights the disproportionate influence of the US dollar in global finance and the existential threat posed by digital currencies and central bank digital currencies.
The decline of the dollar’s dominance
Although the United States contributes about 25% of global GDP, the dollar accounts for approximately 60% of global foreign exchange reserves. However, this dominance is now coming under scrutiny, in part because of the United States’ growing dual deficits and strategic economic sanctions that have prompted countries to look for alternatives to the dollar.
The European Union and China are taking broad steps to strengthen the euro and yuan in international trade. The European Union is focusing on strengthening the euro’s role, especially in energy and commodity transactions. China is promoting the yuan through its cross-border interbank payment system, challenging dollar-focused payment systems.
Meanwhile, other countries have established the BRICS organization to develop non-dollar trade methods among themselves, while Russia is looking into using private digital currencies in some cross-border trade transactions.
The report notes that the rise of cryptocurrencies and central bank digital currencies represents a major challenge to the dollar’s traditional dominance in international finance. These emerging technologies provide more efficient, transparent and accessible financial solutions, which will reduce reliance on traditional banking systems and the dollar in international transactions and reserves.
The rise of digital currencies
The report analyzes the potential impact of these digital currencies and central bank digital currencies on the global financial system. It is hypothesized that as these technologies gain acceptance and use, they could offer practical alternatives to traditional cash and paper currencies.
This shift is expected to reduce dependence on the dollar in international transactions and central bank reserves, which may change the balance of global economic power.
According to the report, Bitcoin, with its decentralized nature and supply limits, has evolved from a niche online concept into a globally recognized asset, with an adoption rate of 106 million owners worldwide. The global expansion of the leading cryptocurrency and its national adoption by countries such as El Salvador as legal tender signals a historic shift in national financial strategies.
Morgan Stanley also pointed to the growing use of stablecoins, which account for up to $10 trillion worth of payments in 2022, as another sign of the changing landscape. Stablecoins are increasingly becoming the preferred payment method due to their 24/7 access and instant settlement.
Moreover, its integration into the payment systems of companies like Visa and PayPal is another sign of its growing importance in the global financial system.
Central bank digital currencies could replace the dollar
The report also touches on the rapid development of central bank digital currencies and their potential impact on the dollar’s market dominance.
More than 111 countries are exploring these digital versions of their national currencies, which could revolutionize financial systems. China’s digital yuan and Brazil’s DREX are examples of how central bank digital currencies can facilitate more efficient and inclusive financial transactions.
According to Morgan Stanley, the rise of central bank digital currencies could simplify cross-border payments, reducing reliance on traditional financial intermediaries such as SWIFT and, in turn, the use of dominant currencies such as the dollar.
The report points to the mBridge project, which involves central banks from multiple countries, as an example of how digital central banks can facilitate efficient cross-border settlements using smart contracts.
Morgan Stanley’s analysis points to a future where central bank digital currencies and other private digital currencies offer viable alternatives to traditional cash and fiat currencies. This shift could gradually reduce the role of the dollar in international finance, influenced by digital innovation and changing geopolitical dynamics.