With much focus on the problems resulting from a strong dollar, the question arises:
Could a currency like XRP become the next global reserve currency?
After World War 2, the US Dollar was named the global reserve currency. This means that global trade was (and still is) conducted via Dollars.
However, at the time, the US Dollar was pegged to gold.
A nation holding US dollars could exchange them for a fixed amount of gold ($35 / oz). Therefore, gold was actually the RESERVE currency, and dollars were simply used to facilitate transactions.
Holding dollars meant holding an allocation of gold.
In other words, dollars were similar to poker chips at a casino. The chips were used to play the game, but at the end of the day, the chips could be cashed out for “real money”.
This arrangement changed in 1971 when the US government ended the option to convert dollars for gold, and the dollar itself became the reserve asset.
Unlike gold that could be mined by any country, the only entity on the planet that can “mine” US Dollar reserves is the US central bank (The Fed).
However, most of the dollars in circulation (digital dollars used via credit cards, debit cards, etc) are actually created by commercial banks.
Anytime a new loan is issued or a line of credit extended, new money is added to the global supply. The massive increase in the supply of dollars has led to inflation.
It’s less widely known that a very large portion of the new dollars have been created outside of the US banks via the offshore shadow banking system (called the Eurodollar market).
In addition, the US government has used its power over dollar reserves to sanction other nations, and in some cases seize their assets.
This has made it risky for some nations to hold their sovereign wealth in US dollars.
Could nations, like those in the BRICS alliance, simply issue a new reserve currency?
Yes, they have the ability to choose a different currency to use for trade, and to store their assets.
Any currency could be used as a payment currency, as long as both parties agreed.
Reserve currencies are generally held by financial institutions and banks in large quantities and are believed to be stable in value. The Euro, the Yen and the Chinese Yuan are all used to store value.
The IMF created a reserve currency called the SDR (Special Drawing Rights). It isn’t used as a payment currency, but as an asset that equates to value (money).
The IMF can use the SDR to issue loans, and members of the IMF can use the SDR to store value.
Bitcoin could be a reserve currency, but nations would have to agree to support an asset they have no control over.
Bitcoin solves the Triffin Dilemma problem that forces a nation issuing the global reserve currency to harm its export business.
Alternatively, it’s more likely that if global trust in fiat currencies collapsed, gold would again become the reserve asset used to price goods via the global trade.
Gold has been trusted for centuries, and is difficult to mine (unlike US dollar reserves). The BIS recently named gold a Tier 1 asset which could indicate the central banks are planning to revalue currencies, and trade, using a gold-based system.
Tier 1 assets are considered the most trusted, and considered to have the lowest risk to hold.
Could XRP become a reserve currency?
My understanding is that XRP is best used as a currency to support transactions across borders, which includes global trade. However, the XRP Ledger is public and open to anyone who wants to build on the blockchain.
If two nations agreed to an oil transaction (one buying from another selling), and the oil was priced in gold, XRP could be used to settle the transaction.
There has been speculation that XRP could be revalued to a higher price to support large transactions done between nations.
That may be difficult to imagine in the current environment.
But if there was a major market event like a currency collapse, the situation would be different.
That could call for a Bretton Woods 3, or new Plaza Accord agreement, and XRP could get repriced in that scenario (along with other sovereign currencies).
There could be multiple global reserve currencies used for trade, but historically, after people lose faith in fiat currencies, people revert back to the core asset of gold.
My hypothesis: We are moving back to a world that centers around gold as it’s most likely to be trusted by nations.
Key currencies like the Dollar and the Yuan could be revalued relative to gold.
XRP could be used to settle trade between nations, and function like the US Dollar did back when it was pegged to gold.