The rise of stablecoins echoes the Bretton Woods system

Cryptocurrency update

Ousmène Jacques Mandeng is a director of Consulting Boutique Economic Consulting Co., Ltd. and a visiting scholar at the School of Public Policy at the London School of Economics and Political Science. He is currently working on many leading central bank digital currency (CBDC) projects and other blockchain-related payment applications. Here, he explained why the call for stablecoins can be traced back to the era defined by the Bretton Woods Conference.

Fifty years ago, the embattled Richard Nixon threw a currency bombshell: The U.S. dollar will no longer be pegged to gold. The currency market fell into chaos because the mechanism supporting the fixed exchange rate was killed overnight. The Bretton Woods era is over, and a new monetary order is formed.

Until now, it has not encountered serious challenges. For many currencies, floating interest rates are still the norm. Except for the euro, there are no other major multilateral attempts to restore the fixed exchange rate system.

But the introduction of so-called global stablecoins by the private sector shows that people are still interested in restoring the Bretton Woods style monetary order.

International currencies are as strong today as they were then, but they are still difficult to implement.

In order to explain why, we need to study in depth the political economy that shapes the global monetary order. The Bretton Woods system emerged under the initiative of the United States during World War II. The idea is to establish a post-war fixed exchange rate framework to promote the recovery of international trade, which is considered essential to the continued growth of GDP and employment. Under this system, all currencies are expressed in U.S. dollars or gold. The system was passed at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, in July 1944, and the IMF was established to ensure that any exchange rate revaluation was approved.

The system has achieved considerable success. It follows the tradition of the gold standard. From the last 25th century of the 19th century (interrupted during World War I and World War II) to the Bretton Woods system, the gold standard is to some extent an international currency standard, so It can be considered that the foundation has been laid for economic and financial globalization.

However, although the fixation of all exchange rates gave the international economy a de facto common currency — and thus promoted trade — countries soon had to put their domestic economic policies under the maintenance of a fixed exchange rate, and the system showed considerable Great pressure.

In 1965, criticism grew louder, especially when the United States obtained unfair benefits because it was able to finance its external deficit with its own currency, which gave it what it called “excessive privilege”. As the United States issued more and more US dollar bonds to fund the Vietnam War, people’s confidence that it had enough gold to pay for it declined. After different attempts to limit the convertibility of U.S. dollar gold, the continued conversion of U.S. dollar holdings to gold in the early 1970s caused a sharp decline in U.S. gold reserves. On August 15, 1971, the United States unilaterally decided to close the “golden window” and end the Bretton Woods system.

The basic idea of ??a global stable currency is similar to a fixed exchange rate: it relies on converting the national currency into a third currency or basket of currencies. Although there are different methods, the most promising one involves a floating-rate common currency that circulates in parallel with the existing national currency. The supply of global stablecoins will depend on domestic currency bids, and the convertibility of domestic currencies will be carried out at the current exchange rate. Global stablecoins need to be able to respond flexibly to positive and negative demand shocks. However, the definition of the “best” currency or basket is complicated, and there is no attempt to come up with a single global stable currency when the economic conditions of countries vary greatly. Nor should it.

Of course, global stablecoins are only stable when they are unstable. In the case of a sudden drop in demand, in principle, conversion to the national currency should be straightforward, because they are not restricted by broader economic policy considerations like the usual national currencies. However, exiting stablecoins very quickly may significantly reduce the currency’s liquidity and speed up conversion. If there are doubts about its convertibility, it may cause some depreciation pressure. Without any credit or liquidity mechanisms, stablecoins may put holders in trouble. In order for stablecoins to become an effective medium and instill confidence, some support mechanisms may need to be established to express the greatest trust in their convertibility.

We do not plan to overhaul the current system at this time. However, the interest in global stablecoins shows the desire to overcome the limitations of the national currency and adopt a medium suitable for international transactions. The Bretton Woods system was also based on similar reasons. Early attempts by the government, such as the Special Drawing Rights of the International Monetary Fund and the European Monetary Unit, had mixed results. If this is still the case, the private sector may fill this gap.

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