this week marks the 50th anniversary of “the weekend that changed the world,” when u.s. president richard nixon stopped the dollar’s convertibility to gold at a fixed price and brought the bretton woods international monetary system to a close. from a monetary standpoint, one of the most surprising aspects of the next half-century was the dollar’s ongoing supremacy as a vehicle for cross-border transactions.
the currencies of smaller economies lack the scale required to move a substantial number of cross-border transactions. the issuance of central bank digital currencies, or cbdcs, according to some, will change the status quo. any national currency will be as easy to use in cross-border payments as any other in this brave new digital world. If, on the other hand, someone is a correspondent bank with offices or accounts in new york, and that something is the dollar, we’re back to square one.
colombia and south korea may be able to issue cbdcs in “wholesale” quantities. both would send digital currency to domestic commercial banks, where it would be deposited into customers’ accounts. the south korean payer would then request a won-denominated depository receipt, and a corresponding amount of cbdc would be removed from the payer’s account. the equivalent quantity of digital pesos would be credited to the colombian payee’s account, thereby canceling the depository receipt. without involving the dollar or correspondent banks, the transaction would be performed in real time at a fraction of the current cost.
the digital corridor between central banks is coming, but it will not change the face of international payments. they will not, however, dethrone the dollar. andrew hammond notes that the conditions for creating this piece are difficult. according to him, it would necessitate complicated governance systems as well as 200 factorial bilateral agreements. It will not take place.
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