Universal Currency, a bipolar world: Will ECCB have to choose?

by Kevin St Bernard

Central bank digital currencies (CBDCs) are digital versions of fiat currencies, which are government-issued currencies that are not backed by a commodity such as gold but are accepted as legal tender.

Unlike cryptocurrencies such as Bitcoin, which are decentralised and not issued by any government, CBDCs are issued and controlled by central banks.

Digital currencies are increasingly gaining attention from global institutions, with many proposals for central bank digital currencies (CBDCs) currently being explored. The International Monetary Fund (IMF) is proposing the development of Unicoin, a CBDC that is expected to be used for international transactions. Similarly, the BRICS nations are discussing the creation of a commodity-backed currency that would provide a reliable and stable alternative to traditional currencies. The Eastern Caribbean Central Bank (ECCB) has already launched its own digital currency, DCash, for use in 8 countries in the Eastern Caribbean Currency Union.

The proposed Unicoin by the IMF is set to be based on a basket of currencies from around the world and has the potential to reduce the need for multiple currencies in international transactions. This could lead to cost savings and increased financial inclusion while also reducing the dominance of the US dollar in international trade. However, there are concerns that the use of CBDCs by governments and central banks may infringe on individuals’ financial privacy and freedom.

The creation of a BRICS commodity-backed currency would be supported by precious metals, such as gold and possibly commodities, such as oil and natural gas. This currency could serve as a hedge against inflation and reduce the dependence of these countries on the US dollar. Nevertheless, the challenges associated with acquiring and storing commodities to back the currency, as well as regulatory and legal challenges, must be addressed before this proposal can be realised.

The emergence of Unicoin and the BRICS commodity-backed currency raises the question of whether countries will have to choose between the 2, creating a bipolar system. However, these proposals may serve different purposes and cater to different needs. For instance, Unicoin may be more suitable for facilitating international transactions, while the BRICS commodity-backed currency may be more appropriate as a store of value.

The ECCB’s DCash, on the other hand, is pegged to the US dollar and is backed by foreign reserves but not by gold, other precious metals or commodities. Its primary objective is to provide a secure, low-cost digital payment option for individuals and businesses in the region while also enhancing financial inclusion and reducing the costs and risks associated with cash usage.

The emergence of digital currencies like Unicoin, the BRICS currency, DCash, and others raises questions about the future of traditional currencies and the dominance of the US dollar. In the West, France has already called for reduced dependence on the US dollar, Mexico has expressed its interest in joining the BRICS group, and other countries may soon follow suit. The decline of the US dollar could put pressure on the value of the EC dollar and the currencies in the reserve basket. As central banks globally add to their net gold holdings, the ECCB may need to consider this option to strengthen the EC dollar and reduce risk. In future, the ECCB may need to choose between shifting the peg on the US dollar to a peg on the Unicoin or the commodity-backed BRICS currency. The option of no peg to any currency but the inclusion of one or both of these new currencies in their reserve basket can also be considered, and having sufficient gold and perhaps even Bitcoin in their reserves can certainly make this transition easier and the EC dollar stronger.

While Unicoin, the BRICS currency and DCash represent unique developments in the world of digital currencies, these proposals may serve different purposes and cater to different needs. Concerns about the potential for governments and central banks to use digital currencies for control must be addressed. The success of these digital currency proposals will depend on their ability to balance the potential benefits with the need to protect individual privacy and freedom.

As the world of digital currencies continues to evolve and several global institutions are exploring the possibility of creating their own digital currencies, it remains to be seen how traditional currencies and the dominance of the US dollar will be affected.

Nevertheless, it is clear that digital currencies have the potential to transform the global financial landscape in significant ways.