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Digital currencies: the battle to challenge the dollar

20 November 2020: In these challenging times, all bets are off when it comes to the structure of our post-COVID economies. Associate professor of fintech Gavin Brown from The University of Liverpool discusses how and why our global currencies may be about to change.

Total global US dollar M2 money supply is presently nearing $19tn, compared to $5tn just ten years ago. M2 is a measure of broad money, a term which includes cash, deposit accounts and cash equivalents. It is therefore a key measure in understanding monetary policy and likely future inflation.

Swift and The Bank of International Settlements (BIS) have recently reported that more than 80% of global trade is thought to involve US dollars, whilst The IMF highlighted that in Q4 2019 the US dollar made up over 60% of all known central bank foreign exchange reserves. The next most common is the Euro at a lowly 20%.

Since the Bretton Woods agreement in 1944, the world came off the gold standard and looked to the might of the US dollar for their fiat currency stability. Yet, despite previous appeals from Russia, China and even Mark Carney for a global reserve currency detached from nations, the US has unsurprisingly held on to this monopoly status.

Turning tides?

However, last year the central bank of China (The PBoC) announced that it has been actively researching central bank digital currencies, or CBDCs, since 2014 and would pilot them in 2020. CBDCs are a next-generation digital fiat currency which can often use blockchain technology, similar to that of Bitcoin, to provide a platform for users to store and transact digital money.

We can already do this, you say? Well, yes and no.

A CBDC would potentially financialise the unbanked or underbanked in our society. The World Bank Group estimates this demographic to number 1.7 billion adults globally or 22% of all adults on the planet.

New digital currencies go live!

In the UK, such a CBDC (if offered at a retail level) could allow every adult to hold a bank account directly with The Bank of England. This would instantly financialise the estimated 1.3 million British adults who presently have no banking and would perhaps go some way to alleviating the tax gap, as well as the shadow economy’s ‘cash in hand’ dealings, which feeds it.

Nonetheless, it is the Chinese who are ahead in this currency arms race. The Bank of England, The Fed and the BIS are all playing catch up. Just last month the Chinese CBDC pilot went live and boasted a staggering 3.3 million transactions. Local governments even offered lottery prizes for citizens who download the digital currency app, thereby signing up some 15% (c1.9 million people) of Shenzhen’s population who took part in an effort to win one of 50,000 red packets containing digital yuan.

Global currency wars between nation-states are nothing new

However, a step-change in technological developments, the continued economic rise of China and the swelling of monetary supply from quantitative easing is changing everything. As accountants, we should monitor these developments and be flexible in our understanding to advise our clients about what the future of money may entail.

Gavin Brown is an Associate Professor in Financial Technology at The University of Liverpool and Fellow of the ICAEW as a chartered accountant.

ICAEW Insights opinion pieces are intended to be thought-provoking and stimulate debate. Views expressed in these opinion pieces are not necessarily shared by ICAEW.

Further reading:

Blockchain: count every vote? Yes you can!

What is DeFi and why does it matter for accountants?

Coronavirus and the cashless economy: a tipping point?

How new digital currencies can help fight COVID-19