America Could Lead the Transition to a Digital Currency Reserve

After spending decades as the dominant global reserve currency, the dollar’s position is being challenged.

The greenback’s share of global central-bank reserves has declined in nine of the past 10 quarters, the International Monetary Fund reported in September. The slide is hardly new: It began a decade ago when European leaders attempted to replace the dollar with a euro-based “basket” of currencies as the common global reserve.

But the United States should not fight against the forces of globalization that challenge the dollar’s reserve-currency status. Instead, it must seize the opportunity to incubate technologies that will enable future digital currencies, which could go on to power a transnational currency — perhaps the best next option for a future global reserve.

Committing to this course would provide a check on attempts to supplant the dollar’s role in the global financial system with other sovereign currencies. It would also put the United States at the heart of a more open and equitable financial system.

There are lessons in America’s technological history that should inform future policy relating to digital currencies. More than three decades ago the United States government supported the development of the internet. Doing so unleashed huge economic impact on America that can still be seen today in the successes of the nation’s biggest technology companies. The digital financial revolution that the world is on the cusp of has the potential to be just as significant for job creation and economic development.

Blockchain, the underlying technology of cryptocurrencies, could prove to be as important to commerce as email and text messaging were to communications. New financial systems built on it could help connect people around the world who lack access to traditional banking services. And these innovations could be leveraged by developers in much the same way as entrepreneurs built web services on the internet — from eBay to Facebook — with the same enormous impact on the American economy.

That is, if we see the opportunity that is before us.

Countries around the world are racing to lead the next revolution in financial technology. While it is clear that the United States and companies like Coinbase were early entrants in this global movement, it is also true that many nations and individuals are jockeying for leadership. There are currently more than 1,400 digital currencies and tokens available, serving a variety of uses. Central banks from China to Sweden to Uruguay are considering issuing their own.

America must maintain its leadership role by leading the way on research and development of cryptocurrency technologies — just as it did in the early days of the internet — rather than stifling it. And if it does, it could ultimately build dominant cryptocurrency technologies that become the backbone of the 21st Century financial system.

Doing so could yield all sorts of wonderful possibilities. In the 21st century when a national market undergoes a major fluctuation, America could enable an alternative currency. It could make it easier for American farmers to sell to foreign customers without the friction of foreign exchange. And its development agencies, like U.S.A.I.D., could “airdrop” cryptocurrencies to hard-hit regions of the world that lack access to banking infrastructure.

That the dollar is under pressure as the world’s reserve currency should only lend more urgency to the endeavor, as America should not come to rely on global cryptocurrency technologies that have been developed by other nations. The United States can retain its leadership role in the global financial system — but only if it nurtures the development of the technologies that will underpin its future.