Currency Dominance in the Digital Age

For over 80 years, the US dollar has held an unrivaled position in global trade and finance, thanks to America's unique blend of economic scale, credible institutions, deep and liquid financial markets, geopolitical might, and network effects. However, a new variable is poised to reshape the global monetary order: data integrity.

The rise of digital technologies as the backbone of international commerce has led to an increasing emphasis on the resilience and credibility of currency networks. As stablecoins, tokenised assets, and central bank digital currencies (CBDCs) gain traction, macroeconomic fundamentals are no longer the only determining factor in currency dominance. The technological strength and security of the relevant infrastructure have become equally crucial.

Stablecoins, in particular, pose a new set of challenges. By privatising seigniorage and facilitating tax evasion, they can shrink countries' fiscal revenues. A stablecoin's credibility is also at risk if it breaks its peg or faces liquidity issues, which can trigger a run on the currency.

Opacity in reporting and auditing, combined with insufficient regulations in some jurisdictions, compound these risks. The consequences of a disorderly run on US dollar stablecoins could be particularly disruptive, given their widespread use as privately issued digital tokens backed by US Treasuries.

The world may also face a new kind of "cyber" run, triggered by weaknesses in the technological infrastructure underpinning digital assets. As quantum computers become increasingly powerful, they may soon be able to break many of the public-key cryptosystems currently in use.

This highlights the need for policymakers to take a proactive approach to addressing these emerging risks. Regulators and citizens must ask fundamental questions about the governance and security of stablecoin systems, including who is responsible for governing the ledger, how it is protected from malicious actors, and what happens if its cryptographic backbone is compromised by developments in quantum computing.

Failure to address these challenges could lead to a volatile and fragmented monetary system reminiscent of the nineteenth century, when the unfettered issuance of private money opened the way for panics, runs, manipulation, and collapse. Instead, we may be headed towards a multipolar monetary system, where some currencies command an "integrity premium" based on their ability to minimise their "attack surface" and maximise data verifiability.

The most successful currencies will offer robust financial architectures that cover every step of the transaction process, from validation to protection of user identities and transaction histories. In this new digital landscape, control over payments infrastructure could increasingly determine economic sovereignty, mirroring the strategic value of naval supremacy in past eras.

Preserving international monetary stability in such a landscape will require more than technological innovation. Global coordination on standards for tokenisation, cryptographic interoperability, data privacy, and post-quantum resilience is essential to prevent the proliferation of balkanised networks governed by conflicting rules and exposed to systemic shocks.

The Future of Monetary Competition

The currencies that dominate tomorrow's international system will be those whose digital ecosystems inspire the deepest trust – both in their institutions and in their code. This requires a fundamental shift in the logic of monetary competition, where technological strength and security become just as important as macroeconomic fundamentals or geopolitical might.

The Path Forward

As we navigate this new landscape, policymakers must take a proactive approach to addressing the emerging risks associated with digital currencies. By prioritising global coordination on standards for tokenisation, cryptographic interoperability, data privacy, and post-quantum resilience, we can prevent the proliferation of balkanised networks and ensure a stable and secure international monetary system.

This will require a concerted effort from governments, regulators, and industry stakeholders to establish common standards and best practices for digital currencies. Only by working together can we build a more resilient and trustworthy global financial infrastructure that serves the needs of both economies and citizens alike.