The US Federal Reserve is right to be concerned, if not worried, about the greenback's dominance of international trade and finance. Fortunately for consumers, growing potential competitive pressure – call it the Libra effect – creates an incentive to make the existing system work better.
WASHINGTON, DC – Since the end of World War II, the United States dollar has been at the heart of international finance and trade. Over the decades, and despite the many ups and downs of the global economy, the dollar retained its role as the world’s favorite reserve asset. When times are tough or uncertainty reigns, investors flock to dollar-denominated assets, particularly US Treasury debt – ironically, even when there is a financial crisis in the US. As a result, the Federal Reserve – which sets US dollar interest rates – has enormous sway over economic conditions around the world.
For all the associated innovation evident since the launch of the decentralized blockchain-based currency Bitcoin in 2009, the arrival of modern cryptocurrencies has had essentially zero impact on the global taste for dollars. Promoters of these new forms of money still have their hopes, of course, that they can challenge the existing financial system, but the impact on global portfolios has proved minimal. The most powerful central banks (the Fed, the European Central Bank, and a few others) are still running the global money show.
Suddenly, however, there is a new, potentially serious player in town: Facebook’s Libra initiative. Facebook and a currently shifting coalition of firms are planning to launch their own private form of money that would, in some sense, be secured by holdings of major currencies.
Without question, Libra could become a widely used form of payment – partly because Facebook has over two billion monthly active users, but also because the existing financial system is full of inefficiencies. If private money could make it cheaper, easier, and safer to make payments, then consumers would be happy to use it. Few people care what is under the hood of the monetary engine; most just want crash-proof transactions.
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