Under pressure of digitalization and geopolitical challenges: internationalization of currencies and their reserve status

Abstract

Digitalization and geopolitical challenges are increasingly being viewed as preconditions for the transformation of global monetary order towards stronger multipolarity. However, according to traditional approaches, current status quo is more viable because of the technological neutrality of reserve currency status. At the same time, alternative approaches point to technological opportunities for the internationalization of the renminbi, which would heighten the competition between the main currencies and hurt the U.S. dollar. Critical overview of new theoretical approaches indicates that putting retail CBDC at the heart of changes in global monetary order is too categorical. It is likely that digitalization will affect the technology of international transactions and thus enhance competition between leading currencies in how they support payment services for clients. Meanwhile, CBDC design issues and cooperation between central banks in transborder digital payments create new trade-offs that support the more traditional approach on global monetary competition. Recent demand trends of reserve assets also contribute to stronger rigidity of the international currency system.