Wall Street giant Morgan Stanley believes that the rise of Central Bank Digital Currencies (CBDCs) and digital assets such as Bitcoin and stablecoins could potentially disrupt the US dollar’s long-standing dominance in the global economy.
The lender made the analysis in a recent report titled “Digital (De)Dollarization?” – highlighting the disproportionate influence of the US dollar in global finance and the existential threat posed by digital currencies and CBDCs.
Dollar’s sliding dominance
Despite the US contributing about 25% of global GDP, the dollar accounts for nearly 60% of global foreign exchange reserves. However, this dominance is now under scrutiny, in part because of the US’s growing twin deficits and strategic economic sanctions that have prompted nations to seek alternatives to dollars.
The European Union and China are making progress to strengthen the euro and yuan in international trade. The EU is focusing on improving the euro’s role, especially in energy and commodity transactions. China promotes the yuan through its cross-border interbank payment system, challenging the dollar-centric payment systems.
Meanwhile, other countries have created the BRICS organization to develop non-dollar methods of trading among themselves, while Russia has looked at using private digital currencies for some cross-border transactions.
The report suggests that the rise of digital currencies and CBDCs represents a significant challenge to the traditional dominance of the dollar in international finance. These emerging technologies offer more efficient, transparent and accessible financial solutions, potentially reducing reliance on traditional banking systems and the dollar in international transactions and reserves.
Rise of the digital currencies
The report analyzes the potential impact of these digital currencies and CBDCs on the global financial system. It claims that as these technologies gain acceptance and use, they can provide practical alternatives to traditional cash and fiat currencies.
This shift is poised to reduce reliance on the dollar for international transactions and central bank reserves, potentially altering the balance of global economic power.
According to the report, Bitcoin, with its decentralized nature and limited supply, has evolved from a niche online concept to a globally recognized asset, with an adoption rate of 106 million owners worldwide. The flagship cryptocurrency’s growing global reach and national adoption by countries like El Salvador as legal tender mark a historic shift in national financial strategies.
Morgan Stanley also pointed to the growing use of stablecoins, which accounted for $10 trillion in payments in 2022, as another sign of the shifting landscape. Stablecoins are increasingly becoming the best payment method due to their 24/7 access and instant settlement.
Furthermore, their integration into payment systems from companies such as Visa and PayPal is another sign of their growing importance in the global financial ecosystem.
CBDCs can replace the dollar
The report also delves into the rapid development of CBDCs and their potential impact on the dollar’s market dominance.
More than 111 countries are exploring these digital versions of their national currencies, which could revolutionize financial systems. China’s digital yuan and Brazil’s DREX are examples of how CBDCs can facilitate more efficient and inclusive financial transactions.
According to Morgan Stanley, the rise of CBDCs could streamline cross-border payments, reducing reliance on traditional financial intermediaries such as SWIFT and, by extension, the use of dominant currencies such as the dollar.
The report points to the mBridge project, which involves central banks from several countries, as an example of how CBDCs can facilitate efficient cross-border settlements using smart contracts.
Morgan Stanley’s analysis points to a future where CBDCs and other private digital currencies offer viable alternatives to traditional cash and fiat currencies. This shift could gradually diminish the dollar’s role in international finance, influenced by digital innovation and shifting geopolitical dynamics.
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