Clearly, this concept is out there as a discussion point, and it could become an actual proposal or project in the future…
In a previous article, we examined a report issued in the fall of 2018 by the OMFIF and IBM. That report summarized where things stood at that time in regards to the potential for central banks to adopt either Central Bank Digital Currencies (CBDC’s) or some form of Distributed Ledger Technology (DLT) or both.
On page 22 of that report we noted an interesting segment that talked about the idea of some day creating a global reserve asset which they called an “e-SDR”. Here is wording from page 22 of that report (I added underlines for emphasis below):
“Digital tokens as reserves The impact on monetary policy would further depend on whether the digital tokens in question have the status of reserves. As one respondent put it, “If these tokens are considered as reserves, and the blockchain system is a new medium for recording transactions, then there should be no impact on monetary policy, and the existing tools may continue to be used.’ Around 80% of survey respondents shared this opinion. In today’s system, the International Monetary Fund’s aspiration for its special drawing right to become a global reserve currency has been held back by conflicting geopolitical interests and priorities of the reserve-issuing central banks of the US, euro area, China, Japan and UK.
CBDCs can circumvent such hurdles by enabling the private sector to work directly with the central banks to create a digital SDR to use as a unit of account and store of value. Such an e-SDR would be the quintessential reserve asset, because it would be fully backed by the reserve currencies in the IMF- determined ratio. The supply of e-SDRs would in turn be dependent on market demand. This would require the creation of a sufficiently large e-SDR-denominated money market.”
Because there is much world wide interest in the idea of the potential for the SDR to become either a competing global reserve asset or even replace the US dollar as the primary global reserve currency, this article will attempt to take a little deeper dive into this idea and some related questions that arise. The goal is to understand as best we can what is actually being talked about here and whether or not the IMF would be involved in this or not. Below we will examine it.
The first interesting thing to note about the segment quoted above in the OMFIF/IBM report is that it appears to be very similar language to what is used in this article on the World Economic Forum web site which first appeared on Project Syndicate (“From Dollar to e-SDR“). Here is a quote from the relevant part of this article:
“A key hurdle for the SDR has always been the geopolitical interests and priorities of the reserve-issuing central banks (not just the US, but also the eurozone, China, Japan, and the United Kingdom). But the advent of cryptocurrencies may offer another way: the private sector can work directly with central banks to create a digital SDR to use as a unit of account and store of value.
Such an “e-SDR” would, in a sense, be the quintessential reserve asset, because it would be fully backed by reserve currencies, in the IMF-determined ratio. The supply of e-SDRs would be completely dependent on market demand.
Of course, to enable a gradual shift from the US dollar to an e-SDR as the dominant international reserve currency, a sufficiently large e-SDR-denominated money market would need to be created. To that end, a politically neutral body, owned by the private sector or central banks, should be established to issue the asset. Participating central banks and asset managers would then have to swap their reserve-currency holdings for e-SDRs.”
The article quoted above is co-authored by Andrew Sheng and Xiao Geng. Clearly, not only we do see similar language to the OMFIF/IBM report, we see some parts that are almost identical word for word as underlined above.
What does all this mean? Let’s use a Q&A type of format to ask and attempt to answer some questions that might arise from what we see above.
Q: Is there a project underway to develop an “e-SDR” along the lines mentioned in the OMFIF/IBM report?
A: I do not believe this means that there is currently a project underway to create an “e-SDR” currency as talked about in the articles above. I think what we see is that this concept or potential proposal is discussed and thought about around the world. We have two independent sources talking about it above. The OMFIF/IBM report worked with 21 central banks from around the world. So clearly, this concept is out there as a discussion point and could become an actual proposal or project in the future.
Q: Is the IMF involved in this in any way?
A: I do not have information that would confirm that the IMF is currently pursuing the creation of an “e-SDR” as described above or even that the IMF is attempting to promote the use of so called “private SDR’s” in any significant way at this time. This topic can quickly get confusing. Please note that we already have the official SDR (O-SDR) currently used by IMF members that is issued by the IMF. I do not believe that either of the articles quoted above are talking about that version of the SDR. We can infer this because both articles say:
“the private sector can work directly with central banks to create a digital SDR to use as a unit of account and store of value.”
The private sector would not be working with central banks to “create a digital SDR” that is the official SDR used at the IMF. Only the IMF can issue those and under certain rules. To change those rules requires a vote of IMF members. The US also has veto power over any such votes taken at the IMF. I believe a new major crisis would have to unfold for the IMF members to push for an emergency increase in the SDR allocation as the political will to do this does not exist at this time.
Also, the existing official SDR (O-SDR) is already digital.
So what kind of “e-SDR” are they talking about here? That is not clearly explained. We do know that there are privately issued SDR’s (called M-SDR’s by the IMF in this note which explains O-SDR’s and M-SDR’s). I am not sure if the “e-SDR’s” talked about above are intended to be “M-SDR’s” or some kind of new cryptocurrency token based on the currency basket makeup of the actual official SDR and are just called an “e-SDR” to help the private sector markets get used to the concept of the SDR as a currency unit.
However, I will again infer that this is a hypothetical concept to propose some kind of currency asset that would be based on the currency basket makeup of the official SDR regardless of whether they are called “M-SDR’s” or not. The way it is worded above, it sounds like private banks might work with central banks (note that it does not say work with the IMF) to create an “e-SDR” token that central banks could classify as reserves on their balance sheet. The mention of using blockchain technology along with this “e-SDR” also suggests they are talking about a new version of an SDR that is different from anything that exists currently.
It’s confusing because we have O-SDR’s (not what these articles are talking about), M-SDR’s (maybe what these articles are talking about) and a now new term “e-SDR’s” used in the articles quoted above (appears to be a token using blockchain which may or may not be a type of M-SDR in the eyes of the IMF).
Regardless of whether my guess is correct and regardless of what you call these, it appears to me that the IMF would not be involved in this process based on anything quoted above. In addition to that, I have gotten input from more than one high credibility source that the IMF is not currently involved in a project like this with the SDR or with privately issued SDR’s.
Q: Why would anyone propose the creation of new SDR’s that does not involve the IMF?
A: I think the article by Andrew Sheng and Xiao Geng linked above from WEF web site provides us the answer to this question. I will just quote it below with my added underline for emphasis:
“Of course, to enable a gradual shift from the US dollar to an e-SDR as the dominant international reserve currency, a sufficiently large e-SDR-denominated money market would need to be created. To that end, a politically neutral body, owned by the private sector or central banks, should be established to issue the asset. Participating central banks and asset managers would then have to swap their reserve-currency holdings for e-SDRs.
Once the private sector comes to view the e-SDR as a less volatile unit of account than individual component currencies, asset managers, traders, and investors could begin to price their goods and services, and value their assets and liabilities, accordingly. For example, the Chinese government’s massive Belt and Road Initiative could be conducted in e-SDRs. In the longer term, an international financial center, such as London or Hong Kong, could spearhead experimentation with e-SDRs using blockchain technology, with special swap facilities being created to make the asset more liquid.”
I believe that this probably means that the IMF is not currently interested in a project like this for themselves, but would probably be fine with outside entities pursuing it as described just above. Again, keep in mind that the IMF requires member approval to change its rules for the official SDR. This approach allows a project like this to be real world tested without needing that kind of IMF membership approval. But it would still require the approval of any central bank involved and perhaps even some governmental regulatory approval in the various national jurisdictions.
Q: Do you think private sector entities and central banks are pursuing the creation of private “e-SDR’s” if the IMF is not directly involved?
A: I would not have any way to know that for sure. Input I get from some experts suggests to me that this is not a project currently in progress and still just a concept for discussion. Any effort along these lines is going to attract a lot of public attention. Anything that is perceived to be a threat to the status of the US dollar as global reserve currency will get noticed for sure by US authorities. Whether this would get to that point is beyond my ability to predict at this time. The report referenced in the 2nd article linked above (see the Palais-Royal Initiative on pages 13-14) illustrates that the idea for promotion of private sector use of a version of the SDR has been around a long time. It is dated 2-8-2011. As best I can tell, any projects underway at central banks related to this are still very early stage with lots of unanswered questions still being studied.
Recently, I discussed this article mentioned above with a friend I view as an expert on these issues who was in town in my part of the world for a monetary policy discussion conference. He mentioned that I should emphasize this statement found in the article:
“Of course, to enable a gradual shift from the US dollar to an e-SDR as the dominant international reserve currency, a sufficiently large e-SDR-denominated money market would need to be created. To that end, a politically neutral body, owned by the private sector or central banks, should be established to issue the asset. Participating central banks and asset managers would then have to swap their reserve-currency holdings for e-SDRs.”
My friend asked me if I thought the part underlined above was feasible given the current political environment we see today. My reply was that it does not seem likely in the current environment, but in some kind of new major crisis like Jim Rickards predicts, perhaps the door might open to explore things like this. Readers can research this and form their own conclusions. But we did agree this is an important issue for people to learn about in case some kind of change like this does emerge in the future.
Summary: This blog article attempts to help clarify a topic that can be confusing and also potentially controversial politically. Both articles cited above say “a key hurdle for the SDR has always been the geopolitical interests and priorities of the reserve issuing central banks” (not just the US, but also the EU, Japan, etc).
This is why I believe it is important to make the effort to understand this topic properly. There are many articles and predictions that talk about the SDR eventually replacing the US dollar as the global reserve currency. But most do not attempt to dig into what all these terms being used actually mean and what is actually being talked about in the various proposals.
For example, what version of the SDR is being talked about when any such proposals are made? Official SDR’s (O-SDR’s), private SDR’s (M-SDR’s), or some new version of an SDR token based on cryptocurrency and/or blockchain technology (e-SDR’s)? And are the latter issued by the IMF or by the private sector working with national central banks?
So, we try to do that here in regards to potential proposals related to the SDR with the help of some excellent input from a variety of highly credible experts. To properly assess a proposal, it’s critical to correctly understand exactly what is being proposed and the basic terms being used in the proposal.
Added note: Here is an article in Reuters dated in 2015 that contains the following quote related to the term “e-SDR”:
“Yao Yudong, head of the People Bank of China’s Research Institute of Finance and Banking, said in a column in the state-backed Shanghai Securities News that the eSDR – the electronic version of the IMF’s Special Drawing Rights (SDR) – would help address flaws in the current global monetary system.”
In the context of this statement, it seems as though Yao Yudong was talking about the official SDR (O-SDR), but it’s always hard to be sure. As many experts have told me, the existing official SDR is already “digital” so I think it adds confusion when anyone talks about an “e-SDR” or “digital version of the SDR” that sounds as if it is something new. Unless they are actually talking about something new. If so, they should explain how it differs from what exists now.
Again, it is very important that people define what they mean when using these terms in our view here.