The dollar diplomacy we need

Conceived in 2022 as a clearinghouse for central-bank digital currencies, mBridge had anchored the BIS’s own work toward a global interbank settlement system to connect CBDCs beyond the control by any single government. Capitalizing on the efficiency gains of blockchain technology, mBridge offered an answer to all who are disenchanted with sluggish and unaffordable cross-border payments. As recently as June, the BIS had doubled down on the initiative, adding Saudi Arabia to its roster of founding central banks and advancing it out of the pilot phase.

Doubtless buffeted by the geopolitical headwinds coming out Kazan, BIS General Manager Agustín Carstens told a Group of 30 meeting in late October that, “we cannot directly support any project for the BRICS because we cannot operate with countries that are subject to sanctions.” Carstens’s comments reflect a growing tension in Western capitals. While many support efforts to use new technology to make the financial system more efficient and egalitarian, they don’t want to usher in a world order that is no longer grounded in Western law and norms.

US intelligence agencies have long highlighted this tradeoff when warning about rogue states that are building sanctions-proof alternative settlement mechanisms or using virtual assets to facilitate bilateral trade (such as between Russia and China). In Kazan, BRICS leaders made no secret of their efforts to create a new financial order and jettison the dollar, echoing long-standing Russian calls for a single blockchain-based BRICS currency to fortify trade against Western sanctions.

The uncomfortable question facing Western policymakers is whether their vision of a borderless digital economy enshrined in Western values is truly best served by a public-led model in which central banks take center stage and organize commerce at the supranational level. After all, a privately led, publicly refereed system has been the norm for the past 80 years.

It was intermediated private money that exported Western rules and norms, creating a financial bulwark beyond NATO members’ borders and hard-coding US sanctions and anti-money-laundering measures into global banking and trade. Banks and multinationals have carried dollars to almost every corner of the planet, simultaneously serving as envoys for the US currency and financial system. For decades, this system has stymied money launderers, state sponsors of terrorism, drug traffickers, and other criminals, pushing them to find ever more creative methods of evasion.

However, rogue actors’ rapid adoption of unregulated forms of digital money has invigorated discussions – among both BRICS and Western leaders – about overhauling the existing global financial architecture. It is no surprise that the BRICS have been at the forefront of projects like mBridge, given its potential to upend the established Bretton Woods order. But rather than shying away from mBridge and successful pilots of new global trade and payments rails, Western leaders should be considering how to make the most of them.

Just as the old international financial rails served Western policy objectives, so can the new digital ones. With mBridge already demonstrating that blockchain technology can connect the global economy through internet-speed transactions, the only question now is how to strike the right balance between public and private involvement.

The answer may be deceptively simple: The most promising alternative to the BRICS vision is to keep the existing architecture but modernize the rails that distribute the dollar, euro, and pound. As matters stand, roughly 90% of foreign-exchange flows are still dollarized, but the Financial Stability Board’s latest assessment of cross-border payments stresses that the fragile, slow, and expensive legacy fiat-currency system needs an upgrade. With consumer cross-border payment costs rising, America’s not-so-secret weapon to address the system’s deficiencies and counter its adversaries’ ambitions is simply to embrace regulated digital dollars and allow the private sector to keep doing what it has been doing.

Can Western policymakers match BRICS leaders’ enthusiasm for digitization and take steps to regulate digital dollars? If so, one of their first steps should be to create a regulatory structure for digital private money in the form of dollar stablecoins, which already has bipartisan support in the US Senate and the House of Representatives. Codifying a US standard for the safe, sound, and regulated use of digital dollars – whether publicly or privately issued – would be an authoritative response to those who want to highlight a tradeoff between using dollars and participating in the digital economy.

By contrast, ignoring the technological implications of mBridge and tokenization could result in a major strategic loss. The dollar is inching toward representing only a plurality, rather than a majority, of global settlements. To borrow Carstens’s own prescient words in 2022: “Let’s ensure that our financial system builds on the existing governance of money, serves the public interest, and works cooperatively with the private sector.”