Prominent American investment bank and finance multinational Morgan Stanley, in an insight article by its Executive Director of Digital Asset Markets, Andrew Peel, has identified the potential of the recent growth of digital assets like Bitcoin and Central Bank Digital Currencies (CBDCs) to erode the hegemony of the greenback in global finance.
In a January 16 report, the investment bank explored the explosive growth of Bitcoin, the promise of stablecoins, and the sudden global interest in CBDCs.
The US dollar (currently) remains the leading currency in global finance, driving over 60% of total global foreign exchange reserves. According to analysis from Andrew Peel, the “paradigm shift in the global perception and use of digital assets” is one of the biggest threats to the hegemony.
Bitcoin Rose to Prominence
Bitcoin started 15 years ago when anonymous founder Satoshi Nakamoto proposed a digital asset based on a decentralized ledger called blockchain, governed by an independent algorithm independent of government control.
Suddenly enjoying widespread adoption across various demographics, the virtual currency has a user base of over 106 million individuals worldwide, including institutional owners like Tesla and even sovereign users like El Salvador, the Latin American country that recently made Bitcoin legal tender.
With this evolution, it is becoming increasingly clear that Bitcoin is more than just a simple digital asset that exists only for its speculative value. With the El Salvador experiment and the recent approval of spot Bitcoin ETFs, the threat to US dollar dominance is undeniable.
How CBDCs Threaten the US Dollar
Central Bank Digital Currencies (CBDCs) are a class of digital currencies that do not (exactly) fit the definition of a cryptocurrency for a couple of reasons. For one, they are not decentralized. Also, CBDCs are issued and regulated by central banks. CBDCs are usually incompatible with conventional crypto blockchains, requiring wallets based on permissioned blockchains to work.
Despite the several criticisms of CBDCs from even cryptocurrency enthusiasts, there is no doubt they have come to stay, with at least 111 countries actively exploring CBDCs as of mid-2023, according to the Morgan Stanley report.
While identifying this trend, Andrew Peel, via the Morgan Stanley report, noted that such a uniform adoption of CBDCs may reinforce calls for establishing a unified cross-border payment standard, displacing the US dollar that has always served that purpose.
Recall a November 2023 prediction by the IMF that central bank digital currencies (CBDCs) may eventually replace cash. With this Morgan Stanley report corroborating the forecast, one may want to pay more attention to similar digital currency predictions in the future.
Dollar-Pegged Stablecoins Reinforce Dollar Dominance
Stablecoins are a different digital currency class that tries to maintain a 1:1 peg with a given fiat currency to solve the cryptocurrency volatility problem. Unlike CBDCs, however, they satisfy the requirements for a cryptocurrency: central banks do not issue stablecoins, and they often use permissionless blockchains.
While the Morgan Stanley report explored how stablecoins, particularly those pegged to the US dollar, are quickly becoming a more efficient alternative to conventional fiat payment systems, it was also quick to point out that dollar-backed stablecoins are helping rather than hurting the current situation.
Since most dollar-pegged stablecoins have dollar reserves, they are not very different from a digital version of the US dollar. Tether, for instance, matches each USDT token with a real US dollar to maintain its peg.
Dollar-backed tokens comprise two of the biggest stablecoins by market capitalization. The only chance of competing with virtual currencies (for America) might be with dollar-backed stablecoins, with multiple attempts to create a central bank digital currency based on the US dollar continuously hitting dead ends.
Dollar-linked stablecoins currently process nearly $10 trillion in transactions, rivaling traditional fiat alternatives like Visa and PayPal. If stablecoins like USDT and USDC continue to grow steadily at this rate, we may see a complete displacement of fiat payment systems, ushering in the inevitable digital currency revolution.
