Cryptocurrency is fast emerging as the most debated financial development of the current times. Is it a phase of asset bubble or are we at the cusp of a new collective international reserve currency regime? Some people consider the latter proposition simply preposterous, but the skepticism about crypto as an international reserve currency comes from a place of myopic view of the development of currency as we know it today.To paraphrase George Orwell, “All currencies are equal, but some more than others.” Some currencies are reserve currencies and are on a greater footing than others.
These reserve currencies are foreign currency held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. These strong fiat currencies are not backed by any commodity and have virtually unlimited supply.Also Read:What are reserve assets; can bitcoin become one?The use of a national currency as an international and reserve currency allows the issuer countries, that are largely developed countries, a larger room to adopt counter-cyclical macroeconomic policies, while constraining the capacity of developing countries to undertake counter-cyclical policies.In a system dominated by a few reserve currencies, developing countries are prone to stronger pro-cyclical swings in the availability and costs of financing, which renders the system highly inequitable.
Emerging markets are more susceptible to have pro-cyclical currencies, whereas advanced economies, especially those with reserve currencies, have countercyclical ones, meaning that the currency tends to rally amid periods of market stress. This inequity fosters the instability of current arrangements.Clearly, we need a true global
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