While the dominant role of the United States dollar in the global market should continue down the line, there is a chance that the rapid ride of the cryptocurrencies might threaten that status. In the long run, private digital currencies like bitcoin and ether, as well as certain government-backed ones, may cut down the dependency on the United States dollar in the long run. Kavan Choksi points out that changing consumer and investor preferences may shift the balance of perceived costs and benefits. That being said, technology alone is unlikely would alter the landscape enough to completely offset the long standing reasons the dollar has been dominant.
Kavan Choksi talks about what the popularity of crypto may mean for the United States dollar
As of now, cryptocurrencies do not pose a serious threat to the U.S. dollar as the world’s reserve currency, even with its rising popularity. Bitcoin specifically has been championed by crypto bulls as a store of value that can be used to hedge against inflation or the debasement of fiat currencies such as the dollar. Many have touted it as “digital gold.” Moreover, bitcoin and other cryptocurrencies also present themselves as a way to purchase goods and services like actual money.
Many have expressed concerns about widespread transactions being executed with the use of a range of cryptocurrencies that are not issued by governments. Dollars can already be traded electronically, so technology is not the issue. The issue is privately issued currency. Prior to the Civil War, it was common for banks to issue their own notes. These notes were traded at different discounts to each other, and people did not like it at all. Something similar might happen with crypto.
It is important to note that the U.S. dollar was made the world’s reserve currency way back in 1944, at the time when the world looked for a central authority. Now the world is in a state of comparative security further inspired by the rise of technology and the internet. Bitcoin fundamentally differs from currencies that are issued by centralized authorities or central banks as it is decentralized.
As per Kavan Choksi, Bitcoin shall become increasingly relevant as an alternative asset and means of payment, but it is unlikely to displace the United States dollar. For Bitcoin to be considered fiat, a legal tender, it should be useful as a medium of exchange, store of value and unit of account at a minimum. Even though Bitcoin is increasingly used as a medium of exchange, it is widely debated whether it shall ever function strongly enough as a store of value and unit of account due to its highly volatile nature. Bitcoin and other cryptocurrencies also face stiff competition from central banks and countries that are reluctant to forgo their dominant positions as issuers of fiat money. A number of them are already experimenting with digital currencies that make use of blockchain technologies that might undo the enthused support enjoyed currently by Bitcoin. Gaining a better understanding of how things will progress with cryptocurrencies shall need further discussion amongst regulators.