In December, we published a global perspective at the end of 2023 and what could be expected this year in a special report titled “On the Eve of 2024.” In it, among many other things, we mentioned that some Central Banks and Sovereign funds had shifted their preference away from the US Dollar as their main reserve currency. This is what we published:
“The worldwide process of de-dollarization is advancing, a sign of the U.S. losing influence, be it in oil markets or other commodities, as more sales are now being transacted in non-dollar currencies. Also, there has been a global tendency towards pulling away from the U.S. Dollar as the world’s reserve currency since the end of the Second World War, and many countries have switched their Sovereign reserves to gold holdings and other assets. The U.S. Dollar has been the foreign exchange reserve of choice for Central Banks; 70% of total global reserves were held in U.S. Dollars in 1999, but according to the International Monetary Fund, the Dollar’s share in global foreign exchange reserves fell to under 60% in the fourth quarter of 2021. Saudi Arabia has been very active in this regard by not only accepting but fostering the use of other currencies in its oil trade.“
Along with that, central banks worldwide have been catching up with technological changes in the digitization of forms of payment and getting ready to leapfrog into the world of central banks’ Digital Currencies (a digital form of a national currency issued by the central bank), in combination with their peers under the guidance of the “Central Bank of Central Banks,” i.e., the Bank for International Settlements (BIS).
In that regard, the BIS launched a project called mBridge consisting of a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement. “Project mBridge is the result of extensive collaboration starting in 2021 between the BIS Innovation Hub, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China, and the Hong Kong Monetary Authority. The Saudi Central Bank is joining mBridge as a full participant. There are also now more than 26 observing members.”
On June 5, BIS announced that “Project mBridge continues its development and has reached the minimum viable product (MVP) stage while broadening its international reach”. This project is a game-changer for the cross-border transfer of money as it will compete with the traditional and widely used SWIFT, the acronym for the Society for Worldwide Interbank Financial Telecommunications network, a cooperative society under Belgian law owned and controlled by its shareholders, founded over 50 years ago as a financial messaging system (https://www.swift.com/about-us/history).
“The project aims to tackle some of the key inefficiencies in cross-border payments, including high costs, low speed, and operational complexities. It also addresses financial inclusion concerns, particularly in jurisdictions where correspondent banking (which connects countries to the global financial system) has been in retreat, causing additional costs and delays. Multi-CBDC arrangements that connect different jurisdictions in a single common technical infrastructure offer significant potential to improve the current system and allow cross-border payments to be immediate, cheap, and universally accessible with the final settlement.”
“As of June 2024, the observing members of Project mBridge include Asian Infrastructure Investment Bank, Bangko Sentral ng Pilipinas; Bank Indonesia; Bank of France; Bank of Israel; Bank of Italy; Bank of Korea; Bank of Namibia; Central Bank of Bahrain; Central Bank of Chile; Central Bank of Egypt; Central Bank of Jordan; Central Bank of Malaysia; Central Bank of Nepal; Central Bank of Norway; Central Bank of the Republic of Türkiye; European Central Bank; International Monetary Fund; Magyar Nemzeti Bank; National Bank of Cambodia; National Bank of Georgia; National Bank of Kazakhstan; New York Innovation Centre, Federal Reserve Bank of New York; Reserve Bank of Australia; South African Reserve Bank; and World Bank.”
It should be noted that this new payment system will accelerate the solidification of regional non-dollar alliances, such as BRICS, which is gaining momentum. Also, in 2023, central banks added 1,037 tonnes of gold – the second-highest annual purchase in history – following a record high of 1,082 tonnes in 2022, according to the World Gold Council. This will slowly shift power away from the hegemon toward a multipolar geopolitical scenario. Yet, nearly the entire global trading system, which includes technology, financing, insuring, and transporting goods and services, requires dollars as a primary form of payment, and as long as many countries (including China with its US 3.2 trillion in foreign currency reserves, and Saudi Arabia) continue to park their reserves in dollars, the greenback dominance has a long way to go, and as it continues to be the world reserve currency and the Treasury can continue selling bonds at low interest rates, Uncle Sam can continue spending and borrowing with no limits or economic risk.
SEPGRA Political Analysis Group.
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