Tech could shake up international monetary system – IMF paper

Changes in the international monetary system have typically been “profound but slow”, research published by the International Monetary Fund says. However, technological shifts could speed up the rate of change in future.

Hector Perez-Saiz, Longmei Zhang and Roshan Iyer use data from Swift to explore the factors driving currency choice for cross-border payments. In a working paper, they highlight the “significant degree of inertia” due to network effects and switching costs, which tends to leave one currency – currently, the US dollar – in a dominant position.

Geographic, political and cultural factors can also shape currency usage, the authors find. Furthermore, legal tender status proves important. Trade and financial linkages “do not appear to have a major impact”.

The findings fit with wider literature on the international monetary system, which has generally found dramatic systemic changes come only rarely, such as the switch from pound sterling to dollar dominance in the mid-20^th century. However, some academics have suggested a switch to a multipolar structure is becoming more likely.

The IMF authors say digital money and new payment systems could drive “radical change” in the system. They also note geo-political shifts could fragment the monetary system, potentially moving it towards a multipolar structure.

They carry out several simulations to test possible futures. While political shifts or changes in legal tender status could increase the use of alternative currencies in some countries, they find effects are small overall. They conclude a major shift looks “unlikely” in the near term, but add that the effect of technology “remains highly uncertain”.