MONETARY HEGEMONY: TECHNOLOGICAL EVOLUTION AND THE INTERNATIONAL MONETARY SYSTEM

In this article, we analyze the evolution of the international monetary
system. Today’s system is built around the US dollar as the core international
monetary instrument, supported by a range of international institutions (in
particular the International Monetary Fund and the Bank for International
Settlements) and domestic and cross-border payment systems, some public,
some private, some mixed. The foundation of this system are major central
banks, in particular the US Federal Reserve, responsible for US dollar
issuance, and with a twin mandate for both monetary stability and economic
growth along with financial stability, all backed by a range of regulatory
mandates focusing on payments infrastructure and finance. This system,
established after World War II as the Bretton Woods international monetary
system, has evolved from one based fundamentally on gold and physical payment and financial arrangements, to one—particularly following the end
of the Bretton Woods system of currencies fixed to the US dollar and the
evolution of a floating exchange rate system from the early 1970s—based on
digital systems, with the approximately $7.5 trillion of foreign exchange
transactions each day almost entirely digital.
This system however has been subject to criticism almost since its
inception, with continual calls to reduce the international monetary
hegemony of the US dollar. Over the past fifteen years, since the 2008 Global
Financial Crisis weakened confidence in the US-led international monetary
and financial order, criticisms and calls for reform have become increasingly
common globally.
In this Article, we highlight two aspects of international monetary
evolution which have been under-addressed: the role of technology and the
role of law. Following a discussion of the evolution of the international
monetary system focusing in particular on the interaction of monetary
hegemony, technological evolution and the role of legal arrangements
(public, private, domestic, international), we turn to our central thesis: a
technological revolution in monetary and payments systems is introducing
alternatives and competitors to the existing international monetary regime
based on the US dollar and offers the opportunity to build an improved
international system, a system which, for the first time, may not be based on
a single dominant monetary instrument.
We bring these various elements together to consider a range of scenarios
for the future of the international monetary system, highlighting in particular
new initiatives from the IMF and BIS which could serve as the basis of new
international multicurrency payment arrangements. We analyze the new
technologies which could underpin such a new system and the possible role
of a Digital Dollar. We conclude that the geopolitics of a multipolar world
coupled to the evolution of enabling technologies may well result in a small
number of major economy central bank digital currencies and currency
areas, eliminating the historical pattern of monetary hegemony. There is a
clear need to redesign systems to support international monetary and
payment arrangements as a public good, and we explore how this might be
achieved.