Federal Reserve: Digital Currencies “Pose a Challenge” to Dollar

Reading Time: 2 minutes
  • The Federal Reserve has warned that the EU, China and digital currencies “pose a threat” to the dominance of the U.S. dollar
  • The Fed says that the dollar is safe in the short to medium term, but long term it could be in trouble
  • Other notable voices have weighed in with their negative predictions of the dollar in the past few months

The Federal Reserve has admitted that digital currencies could “pose a challenge” to US. dollar dominance, although it predicts that the dollar will remain the international currency standard for the “foreseeable future”. In a paper called The International Role of the U.S. Dollar, authors Carol Bertaut, Bastian von Beschwitz, and Stephanie Curcuru examined the confidence in the U.S. dollar as a store of value and how dominant it remains globally. Their summary is that the dollar still has the potential to remain the world’s reserve currency but there are various factors that could knock the train off its tracks over time, one of which is digital currencies.

Threat to Dollar in “Longer Horizon”

The Federal Reserve report paints a picture of current and future U.S. dollar dominance, stating that “near-term challenges to the U.S. dollar’s dominance appear limited”, although there is more risk of a challenge to the dollar’s international status “over a longer horizon” which could push people to use other forms of currency.

Among the states threats are the EU and China, but the Federal Reserve also states that dollar advocates should be wary of “a shifting payments landscape”:

For example, the rapid growth of digital currencies, both private sector and official, could reduce reliance on the U.S. dollar. Changing consumer and investor preferences, combined with the possibility of new products, could shift the balance of perceived costs and benefits enough at the margin to overcome some of the inertia that helps to maintain the dollar’s leading role.

Federal Reserve Doubters Adding Up

While the Federal Reserve counters that “it is unlikely that technology alone could alter the landscape enough to completely offset the long-standing reasons the dollar has been dominant”, their concerns echo those already made by other notable commentators.

Figures such as Robert Kiyosaki and Stephen Roach are among those who have cautioned that the dollar is losing its place as the world’s reserve currency, something that also worries Donald Trump (among many other things).