Death Of The Dollar – Why Currencies Are Not Forever

November 25, 2017

Nothing is forever. Such is the case for cash. Sweden is shaping up to be the first country in the world to have a cashless economy. By 2020 it aims to have reduced all cash transactions to 0.05%. Just last year, India underwent a dramatic experiment to remove 86% of all bank notes out of circulation designed to clamp down on tax evasion and corruption.

Sure, removing cash is a great thing. Economists have heralded the benefits for ages. From flushing out black markets and underground economies, to enabling the use of negative interest rates during economic crises, cash looks like a redundant and outdated medium of exchange.

Physical bank notes and coins are slowly losing their value over time due to inflation and are becoming redundant with the onset of contactless debit and credit cards. Transactions can be paid at the scan of a fingerprint.

But why limit a new technology to old ways of using it? This is simply automation, not revolution.

The process of exchanging currencies for consumers and businesses is already being improved without the application of blockchain. Companies such as Transferwise and Revolut have successfully challenged the existing model and provided a viable alternative to banks by reducing transaction fees and increasing the speed of transfer.

China’s motivation to fully embrace the digital age is to solidify its national currency as a reserve currency and is manipulating the most advanced technology to do so. The Chinese central bank has already completed a trial run of digital currencies based on blockchain technology.

All of the above, however, is still tied down to the assumption that the notion of a reserve currency will matter to the same degree that it does today.

This raises the question, why stick with currencies that are tied down to nationalities? The US dollar, the British pound, the Japanese yen, the Swiss franc, the upcoming digital Chinese yuan and crypto-ruble – all of these were and will be a product of a pre-digital world theory, stubbornly tied down to abstract notions of national identity.

Today there are 180 fiat currencies and over 1,000 cryptocurrencies.* This multitude of currency pairs inevitably necessitates complicated schemes of hedging and arbitrage to secure any resource at the best rate. This model is the best we have today, but its limitation remains that it cannot produce a win-win scenario to all parties in a transaction due to exchange rate fluctuations, which can be highly variable and costly.

Superpowers bicker over currency wars; emerging market countries tremble at anything the US Fed says. But is the dollar dying? Any country that fails to acknowledge the existence of an international community and adapt to it, faces its own demise.

It is our view that sooner or later the traditional model of currencies based on national identities will be replaced by a new regime of digital currencies that will better represent the state of the world as an interconnected global community. This is what we term as the ‘post-reserve currency era’ and the onset of ‘digital redenomination’.

 

* Not all cryptocurrencies are designed to be used as means of exchange and to facilitate transactions.

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