Fiat-assisted Cryptos like Libra could one day compete to become universal currencies that anyone anywhere can freely use without the burdens of currency exchanges and associated costs.
Bitcoin has little if any chance, despite the rhetoric around its potential of potentially acting just so.
The US Dollar is not, and most likely will not be a universal currency, despite its massive appeal.
The recent UK Brexit is a good indicator that countries are not ready to become fully immersed under one currency like the Euro in this case.
In March 2009, China and Russia called for a new global currency, mostly for fear of the Dollar devaluating and severely impacting these countries massive reserves of the greenback.
So is the idea, appealing as it might be, dead on arrival?
Universal Currency appeal
A currency accepted everywhere by all governments. It can result in better global trade and entails the creation of a global monetary union that can possibly solve currency-related crises, exchange rates and economic risks.
Goes without saying that countries with stronger economies are in a better position under the regime of a universal currency as they will be better represented in the universal central bank and fiscal policy making.
1-Simplification: Trading can be made faster, cheaper and without the complex procedures volatility, and complications of international trading dynamics.
2-Price Stability: Price manipulation via currency devaluation to render goods appear cheaper will be out.
1-Lack of homogeneity: Can’t lump economic and political settings of the world’s countries under one umbrella. Some countries may resort to interest rate cutting to overcome crisis.
2- Susceptibility: Economic problems in one or a few countries can send shockwaves to the rest of the world.
The US Dollar: Isn’t it global?
Not quite: It resembles the English language, widely used and necessary but no country is bound by it to survive.
Many countries keep dollar reserves and use the US dollar because the value of their currencies are pegged on it.
The 1944 Bretton Woods Agreement paved the way for the US dollar to become the benchmark for establishing the value of a country’s currency instead of gold.
The most popular currencies are the U.S. dollar, the euro, and the yen. Another name for a global currency is the reserve currency, according to The Balance.
According to the International Monetary Fund, the U.S. dollar is the most popular. As of the first quarter of 2019, it makes up 61% of all known central bank foreign exchange reserves.
More than one-third of the world’s GDP product comes from countries that peg their currencies to the dollar.
Almost 40% of the world’s debt is issued in dollars.
Still it’s not enough to make it global.
The euro, by the way, makes up 20% of known central bank foreign currency reserves.
The chart below shows a breakdown of the 10 most traded currencies in 2018.
Universal Currency already exists
Universal Currency (UNIT) is a cryptocurrency. Users are able to generate UNIT through the process of mining. Universal Currency has a current supply of over 20 million with around 16 million in circulation. The last known price of Universal Currency is $0.007269. It is currently trading on 1 active market. Its crypto market rank is 1441, and has a Market Cap of $115,941.
Which brings us to cryptos
Could a sovereign-free, algorithm-based alternative like Bitcoin be more stable and trustworthy than fiat?
Bitcoin is not ideal either. It needs to have a flexible supply, which it doesn’t as by nature it has a finite supply limit. It’s the same reasoning why banks have limits on the amounts of Gold it could hold, because of its scarcity.
Also Bitcoin today is too volatile experiencing severe price swings, gaining or losing thousands of dollars almost overnight.
“If bitcoin is going to reach its potential as a viable global currency, it’s going to need to scale beyond the base layer,” said Brian Murray, Managing Director at Craft Ventures.
Facebook’s Libra could be one, as it is backed by a basket of currencies and government debt that is periodically rebalanced and used to peg a digital token that can be used for settlement.
If Libra ever sees the light of day as it is experiencing strong distrust born out of Facebook’s corporate motives and global ambitions.
Another such model, much more likely, is a revamped Special Drawing Right (SDR). This basket of currencies was created by the IMF in 1969 to act as a private transaction token and a “store of value” for members. Its value moves in line with that of the underlying currencies: The U.S. dollar, Japanese yen, euro, British pound and Chinese renminbi.
Several economists have proposed the expansion of the SDR’s scope for purposes of international trade, positioning it as a global reserve currency that does not depend on any one issuer and can be managed by a neutral, supra-national organization with economic stability as its main objective.
The problem is, even a liquid SDR in its current configuration would be subject to national priorities and vulnerabilities. A sharp depreciation in the U.S. dollar as central banks switch to the SDR as a reserve holding could destabilize the basket.