BOE Governor Carney Makes Case For Digital Currency Spanning Borders

Mark Carney, Governor of the Bank of England, wants to replace the dollar’s dominant role in the global economic system with a cryptocurrency controlled by public authorities. He made the suggestion at a gathering of governors of the U.S. Federal Reserve in Jackson Hole, Wyoming.

The Case for a Synthetic Hegemonic Currency (SHC)   

Carney’s suggestion of a global currency spanning borders comes at a time of increasing economic uncertainty.

Two of the world’s biggest economies – the U.S. and China – are engaged in a trade war that could have negative implications for their economic growth. Europe is caught in a spiral of moribund growth and countries within the EU are resorting to negative or zero interest rates to drive demand.

Emerging markets could provide a silver lining in this dismal scenario but the dollar’s dominant status as a global currency means that they are beholden to its price swings for their trade accounting. The current appreciation in the dollar’s price will negatively impact their balances.

According to Carney, there was a need to change the game in the longer term. “When change comes, it shouldn’t be to swap one currency hegemon for another,” he said and added that financial integration and globalization had heightened the risk of economic shocks coursing through economies of multiple countries. In Carney’s opinion, there was a need to build a new system more representative of the multipolar and diverse emerging global economy.

To that end, he made the case for a new “Synthetic Hegemonic Currency” working through a network of central bank digital currencies as a possible replacement. “Even if the initial variants of the idea prove wanting, the concept is intriguing,” he said. “An SHC could dampen the domineering influence of the U.S. dollar on global trade.”

Carney’s comments came a few hours after President Trump announced escalation of his trade war with China via Twitter. In the past, he has also criticized Fed policy and attempted to coerce it into following his dictates.

A Mixed Reaction

Carney’s provocative proposal drew a mixed reaction from economists and academics gathered at the confab. Adam Posen, president of the Peterson Institute of International Economic Institute, said the desire to get out of the U.S. dollar’s dominance was a healthy one but “the idea that there’s a technological fix that will achieve it strikes me as a mistaken.”

“From my work in studying the role of the dollar in the international monetary system, it does strike me that he’s right. I don’t think the central banking community has really taken it into account,” said Stanford academic Arvind Krishnamurthy, who presented a paper at the conference suggesting that the dollar had become like gold. Olli Rehn, a member of the European Central Bank’s Governing Council, said the idea was “worth pondering in a wider context of the digitization of our monetary and banking system.”