Mark Carney, the governor of the Bank of England, is calling for an overhaul of the global financial system, which he believes is achievable by creating and adopting a currency similar to Facebook’s Libra. Carney believes that such a coin would have the potential to end the U.S. dollar’s dominance.

Speaking at the Economic Policy Symposium in Jackson Hole, Wyoming on August 23, Carney explained that it is vital that a new international money and financial system (IMFS) be introduced.

“The structure of the current international monetary financial system is making it increasingly difficult for monetary policy makers to achieve their domestic mandates to stabilise inflation and maintain output at potential,” he explained.

While the dollar has played a significant role in the world economy over the better part of the past century, Carney believes that it is high time to replace it.

U.S. dollar’s dominance might mean peril for some countries

In addition to the dollar’s widespread use in international securities issuance and settling international trades, it is also a reserve currency for many countries around the world.

The International Monetary Fund (IMF) reports that at the end of Q1 2019, the U.S. dollar accounted for more than 61% of the world’s foreign currency reserves.

Carney noted that because of the global dominance of the dollar, “developments in the U.S. economy, by affecting the dollar exchange rate, can have large spillover effects to the rest of the world via asset markets.”

To prevent the collapse of economies, Carney maintains that the U.S. dollar must cease being the world’s reserve currency.

Two possible contenders to replace the dollar

Carney proposed two options that he believes would work effectively as the dollar’s replacement. The first is the Chinese renminbi, which he noted: “has a long way to go before it is ready to assume the mantle.”

The second option is a digital currency backed by an international coalition of central banks. This currency would work in a similar way to Facebook’s proposed Libra stablecoin.

“It is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.

“An SHC could dampen the domineering influence of the U.S. dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the U.S. would have less potent spillovers through exchange rates, and trade would become less synchronised across countries.”

Disrupting the current money network

Per Carney, technology can change the current network effects that protect the U.S. dollar. For instance, most transactions now occur online and use electronic payments instead of cash.

Touting the benefits of “new technologies” entering the space, Carney said:

“[The] relatively high costs of domestic and cross border electronic payments are encouraging innovation, with new entrants applying new technologies to offer lower cost, more convenient retail payment services.”

He gave the example of Facebook’s Libra, though like the renminbi, he doesn’t think the stablecoin has what it takes to replace the dollar as it still has to address myriad regulatory concerns.

Explaining why it would be easier to take the SHC option instead of the Chinese renminbi, Carney concluded:

“It is worth considering how an SHC in the IMFS could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi.”