These are quotes from the study “Overcoming the Notion of a Single Reference Currency: A Currency Basket Approach” written by our CEO Helie d’Hautefort and our advisor Giuseppe Ballocchi; published by the CFA Institue Research Foundation

To successfully manage wealth over the long term, we need to think deeply about the economic function of money, particularly as a store of value but also as a medium of payment and a unit of account. We also need to adopt a more holistic approach to risk, heeding the lessons of economic history: No currency, in particular no fiat currency, has survived the test of time over the very long term.

Risk must be managed not only under what appears to be the most likely scenario but also under extreme scenarios. We must overcome the cognitive biases of short-termism, overconfidence, and functional fixation and follow the practices of central banks in the diversification of currency risk.

With wealthy families becoming more and more global and the world becoming multipolar (or apolar), the notion of a single reference currency is too simplistic. Sticking to it means failing to manage currency risk and potentially incurring adverse long-term outcomes.

The solution is a diversified currency basket, with weights corresponding to the currency composition of liabilities and financial objectives. Each family must decide how best to manage its wealth and its own diversification plans.

A “one-size-fits-all” approach cannot succeed because every family has its own individual exposures, revenues, and expenses spread out to every corner of the globe. Because the currency composition of a globally mobile family’s long-term financial objectives is often not known, we should think in global rather than local terms, moving away from a single base currency to something more indicative of how global economic power is shifting. Neglecting currency risk, or dealing with it through approaches that are too simplistic, can be seriously damaging to financial health.

The proposed solution: A global currency basket

We have argued that a single reference currency does not make sense for a wealthy family because it is unlikely to serve as a reliable store of value over the long term and thus constitutes a misleading unit of account as well. In extreme cases, it may also fail to function as a medium of exchange for international payments if the family is shut out of the payment system of the country issuing the reference currency. The optimal reference would be a currency basket with weights corresponding to the family’s liabilities and objectives.