In a 1955 speech to a group of investment bankers, then-US Federal Reserve (Fed) Chair William McChesney Martin shared a story about an economics professor who always administered the same exam. When asked how any student could fail such a test, the professor replied: “The questions don’t change, but the answers do.”
This story remains pertinent today, not only for Martin’s successors at the Fed. The current debate about the dollar’s future often presents two stark viewpoints: Its global reserve currency status is rapidly declining due to geopolitics and US fiscal policies, or it continues as the undisputed dominant currency with no challengers in sight.
In reality, the situation is more complicated. Despite the dollar’s dominance in trade finance and foreign exchange, these areas might not fully reflect its strength. Payment systems are more accurate indicators of a currency’s future position. Central bankers compare payment systems to plumbing: You can only use them once the infrastructure is in place. This infrastructure could pave the way for a currency’s status to change more swiftly than anticipated, as seen in the shift from the pound sterling to the dollar in the 1920s, a transition few foresaw.
In recent years, countries have been actively improving their financial plumbing. Fast-payment systems have transformed the financial landscapes of countries like Brazil and India.
Countries have also begun interlinking their financial infrastructure, enabling near-real-time settlement across national borders. Project mBridge connects central and commercial banks from China, Hong Kong, Thailand and the United Arab Emirates without relying on the dollar. Saudi Arabia joined the project earlier this month and several more countries are expected to do so this year.
Gita Gopinath, the International Monetary Fund’s First deputy managing director and its most senior US official, recently attributed the increased use of the renminbi to China’s Cross-Border Interbank Payments System, which acts as a clearinghouse, similar to the US Clearing House Interbank Payments System. While many of these projects are relatively small compared to the overwhelming volume of dollar-based transactions, they should not be overlooked.
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Interest in alternative financial architectures has risen due to the perceived risks of relying on Western systems. The Atlantic Council’s research shows a notable uptick in countries exploring new payment technologies since the West imposed sanctions on Russia after it invaded Ukraine.
Jordan Bleicher, the Chief Legal Officer at Radius Technology Systems, is a former adviser at the US Treasury Department and the Federal Reserve Board.
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These projects aim to enhance cross-border payments, making them faster, cheaper and more reliable, potentially decreasing demand for the dollar. This shift could raise costs for US borrowers and heighten vulnerability to macroeconomic shocks over time.
The immediate risk is that these new systems could undermine America’s national security. They enable transactions without US banks, reducing Treasury Department access to financial intelligence and weakening sanctions enforcement. Globally, governments and banks have long sought alternatives to the dollar, and new digital technologies now make this transition more affordable.
In responding to these challenges, US policymakers’ top priority should be ensuring that future cross-border payment systems align with US values and interests, such as maintaining the global financial system’s stability. One way to pursue this objective is to advocate that new cross-border payment systems meet existing international standards.
However, the US would likely have greater influence over these new payment systems if it were actively involved in developing, building, and operating them, such as establishing the Swift and Continuous Linked Settlement interbank payment systems.
Cross-border payments
Despite a slow start, America’s significant incumbent advantage should facilitate rapid catching up. US correspondent banks serve as central nodes for cross-border payments and the country hosts leading mobile payment providers and fintech companies. Policymakers should convey to the private sector that new cross-border payment solutions are crucial geopolitically and establish clear guidelines to foster responsible innovation.
The Fed has a critical role to play in facilitating this shift. Central banks worldwide — including the Bank of England (BOE), the European Central Bank, the Bank of Japan and the Monetary Authority of Singapore — are driving payment innovation in their respective jurisdictions and globally.
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Josh Lipsky, the Senior Director of the Atlantic Council’s GeoEconomics Center, is a former adviser at the International Monetary Fund and the US State Department.
Yet, the Fed’s unclear vision hampers effective coordination among US allies and partners, raising the risk of a fragmented global financial system. Failure to match technological innovation could diminish central bank influence in settlement processes, posing risks to financial stability.
Given that the Fed has traditionally focused on improving the efficiency and integrity of payment systems, aligning itself with a particular administration’s geopolitical agenda, some may fear that it could endanger its independence.
Recognising the Fed’s geopolitical role doesn’t necessitate changing its mandate. The Fed should promote payment innovation to enhance efficiency and security for dollar transactions globally, preserving its global dominance and economic security benefits. This aligns with its historical role in expediting check processing a century ago.
Already, the Fed has taken several promising steps. In 2023, it launched a new fast-payment service called FedNow, which, if widely adopted, could be linked to other jurisdictions’ systems and enhance the dollar’s international appeal.
Meanwhile, the New York Fed is participating — along with the Bank of Japan, the BOE and four other central banks — in the Bank for International Settlements’ Project Agorá, which explores how emerging technologies like tokenisation and shared ledgers could improve cross-border payments. While these initiatives are important, the Fed must act faster and more decisively, given the significant gap between proof-of-concept and implementation.
July marks the 80th anniversary of the 1944 Bretton Woods conference, held amidst World War II. Despite the ongoing crisis, 44 participating countries established the foundation for new international institutions and future financial innovations.
Reviving the spirit of Bretton Woods is essential to maintain the dollar’s reserve-currency status and associated benefits for the US. As the economics professor in Martin’s story suggested, it is time for new answers to enduring questions.
Jordan Bleicher, the Chief Legal Officer at Radius Technology Systems, is a former adviser at the US Treasury Department and the Federal Reserve Board. Josh Lipsky, the Senior Director of the Atlantic Council’s GeoEconomics Center, is a former adviser at the International Monetary Fund and the US State Department.
