Douglas Arner et al on Monetary Hegemony: Technological Evolution and the International Monetary System (ILJ)

“Monetary Hegemony: Technological Evolution and the International Monetary System”
Douglas W. Arner, Ross P. Buckley, Dirk A. Zetzsche, and Anton N. Didenko
Boston University International Law Journal, ILJ 42.2 — Summer 2024
Published online: October 2024

Abstract: In this article, we analyze the evolution of the international monetary system. Today’s system is built around the US dollar as the core international monetary instrument, supported by a range of international institutions (in particular the International Monetary Fund and the Bank for International Settlements) and domestic and cross-border payment systems, some public, some private, some mixed. The foundation of this system are major central banks, in particular the US Federal Reserve, responsible for US dollar issuance, and with a twin mandate for both monetary stability and economic growth along with financial stability, all backed by a range of regulatory mandates focusing on payments infrastructure and finance. This system, established after World War II as the Bretton Woods international monetary system, has evolved from one based fundamentally on gold and physical payment and financial arrangements, to one—particularly following the end of the Bretton Woods system of currencies fixed to the US dollar and the evolution of a floating exchange rate system from the early 1970s—based on digital systems, with the approximately $7.5 trillion of foreign exchange transactions each day almost entirely digital. This system however has been subject to criticism almost since its inception, with continual calls to reduce the international monetary hegemony of the US dollar. Over the past fifteen years, since the 2008 Global Financial Crisis weakened confidence in the US-led international monetary and financial order, criticisms and calls for reform have become increasingly common globally. In this Article, we highlight two aspects of international monetary evolution which have been under-addressed: the role of technology and the role of law. Following a discussion of the evolution of the international monetary system focusing in particular on the interaction of monetary hegemony, technological evolution and the role of legal arrangements (public, private, domestic, international), we turn to our central thesis: a technological revolution in monetary and payments systems is introducing alternatives and competitors to the existing international monetary regime based on the US dollar and offers the opportunity to build an improved international system, a system which, for the first time, may not be based on a single dominant monetary instrument. We bring these various elements together to consider a range of scenarios for the future of the international monetary system, highlighting in particular new initiatives from the IMF and BIS which could serve as the basis of new international multicurrency payment arrangements. We analyze the new technologies which could underpin such a new system and the possible role of a Digital Dollar. We conclude that the geopolitics of a multipolar world coupled to the evolution of enabling technologies may well result in a small number of major economy central bank digital currencies and currency areas, eliminating the historical pattern of monetary hegemony. There is a clear need to redesign systems to support international monetary and payment arrangements as a public good, and we explore how this might be achieved.