The idea that Bitcoin might one day replace fiat currencies, or even dethrone the US dollar as the world’s primary reserve currency, has gained traction as Bitcoin becomes more widely recognized. But is this truly feasible? We examine this question using data from the US Federal Reserve and the concept of "monetary hierarchy," though the conclusion may disappoint some proponents.
In a recent report titled "The International Role of the U.S. Dollar," the Fed highlights the continued dominance of the dollar, supported by the size of the US economy, deep financial markets, and high liquidity. The report evaluates the dollar’s role based on key monetary functions: store of value and medium of exchange.
The Dollar as the Leading Global Reserve Currency
According to IMF COFER data, the US dollar constitutes about 60% of all officially reported foreign exchange reserves worldwide. Although this is a decline from 71% in 2000, it still far exceeds the share of other major currencies. The euro accounts for 21%, the Japanese yen 6%, and the British pound 5%. The Chinese renminbi, often considered a potential rival, represents only 2%.
Most of these official dollar reserves are held in the form of US Treasury securities. Demand for US debt is strong not only among official institutions but also private investors. As of Q1 2021, foreign official and private investors held about $7 trillion, or 33% of all outstanding Treasuries. US domestic private investors held 42%, while the Federal Reserve system held approximately 25%.
Since 2015, the proportion of US Treasuries held by foreign investors has decreased. This is partly due to increased monetary expansion by other developed economies, including the Eurozone and Japan. Although the relative share has declined, absolute holdings remain substantial compared to euro-area government debt, British gilts, or Japanese government bonds.
In addition to Treasury securities, foreign investors hold significant amounts of US dollar banknotes. Over the past two decades, both the value and volume of US currency held abroad have increased. By Q1 2021, foreign holdings of US banknotes exceeded $950 billion—about half of all US dollars in circulation. This number is likely a conservative estimate, as accurately tracking foreign-held cash is challenging.
The dollar also serves as an anchor currency for many countries. This means central banks purchase dollar-denominated assets to manage their own exchange rates. In 2015, countries that pegged their currency to the dollar accounted for about 50% of global GDP (excluding the US). In contrast, those anchoring to the euro contributed only 5%.
The Dollar’s Role in International Trade and Finance
The US dollar acts as a primary medium of exchange in global trade and finance. Research covering the period from 1999 to 2019 shows that the dollar was used in 96% of trade invoices within the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world (excluding eurozone transactions, which are predominantly in euros).
The dollar is also the dominant currency in international banking and debt markets. Data from the Bank for International Settlements (BIS) indicates that approximately 60% of all international loans, foreign currency liabilities (mainly deposits), and claims (such as loans) are denominated in US dollars. This share has remained stable over the past 20 years. By comparison, the euro accounts for only about 20%.
Similarly, around 60% of all corporate bonds issued in foreign currencies are dollar-denominated, consistent with the patterns observed in international debt markets.
The foreign exchange market further underscores the dollar’s centrality. With a daily trading volume of $6.6 trillion, forex is the most liquid financial market in the world. According to the IMF’s triennial survey, in April 2019, about 88% of all foreign exchange transactions involved buying or selling US dollars. This figure has been stable for two decades. The euro was involved in 32% of trades, down from 36% in 2010.
Note: The total sum of currency shares in forex trading is 200% because every transaction involves two currencies.
The Fed’s Conclusion: The Dollar’s Status Remains Stable
Contrary to popular belief, the US dollar’s role in the global economy has remained remarkably consistent over the past 20 years. To quantify this stability, the Fed constructed a composite index of international currency use based on five metrics: official currency reserves, foreign exchange trading volume, outstanding external debt, cross-border deposits, and cross-border loans.
This index assigns the US dollar a value of about 75, significantly higher than any other currency. The euro scores 25, while the British pound and Japanese yen are near 10. The Chinese renminbi is close to zero.
The report concludes:
In summary, barring large-scale political or economic shifts that undermine the dollar’s role as a store of value and medium of exchange—and absent the emergence of a powerful alternative—the US dollar will likely remain the world’s dominant currency for the foreseeable future.
Final Thoughts
Since the 2008 financial crisis, quantitative easing (QE) policies implemented by the Fed have increased the money supply, arguably reducing the purchasing power of fiat currencies. Combined with central banks’ explicit target of 2% annual inflation, it is understandable why some in the crypto community hope that Bitcoin—with its fixed supply—could eventually replace fiat money.
Proponents argue that as Bitcoin’s price volatility decreases, it could discover its "true value," become a reliable unit of account, and even serve as a global standard of value. But is this realistic?
Available evidence suggests it is highly unlikely. As the Fed’s report illustrates, the dollar’s position as the leading reserve currency, preferred unit for trade invoicing, and dominant denomination in debt markets remains unshaken. This is due not only to US economic and political influence but also to the dollar’s entrenched role in the international monetary hierarchy.
Most people think of money as a single homogeneous category, but in reality, currencies exist within a hierarchical structure that expands and contracts with economic cycles. This hierarchy places the US dollar at the top, a position that is difficult to challenge.
For those interested in learning more about how monetary systems are structured, you can explore more strategies on monetary evolution and digital assets.
Frequently Asked Questions
Why is the US dollar considered the world’s reserve currency?
The US dollar is the most held reserve currency due to the size and stability of the US economy, the depth of its financial markets, and its use in international trade and finance. It accounts for about 60% of all global foreign exchange reserves.
Can Bitcoin become a global currency?
While Bitcoin has gained adoption as a speculative asset and medium of exchange in certain contexts, its high volatility, scalability issues, and regulatory uncertainties make it unlikely to replace established fiat currencies like the US dollar in the near future.
What is monetary hierarchy?
Monetary hierarchy refers to the layered structure of currencies and money-like instruments within an economy. Typically, central bank money sits at the top, followed by commercial bank money, and then other liquid assets. The US dollar currently occupies the highest tier internationally.
How does the Fed support the US dollar’s role?
The Federal Reserve influences the dollar’s stability through monetary policy, regulating interest rates, and acting as a lender of last resort. Its policies aim to maintain confidence in the US financial system.
What are the main competitors to the US dollar?
The euro, Chinese renminbi, and Japanese yen are often cited as potential rivals, but each has limitations—such as narrower liquidity, less open capital accounts, or smaller financial markets—that prevent them from challenging the dollar’s dominance.
Is the dollar’s dominance permanent?
No currency’s dominance is permanent, but replacing the US dollar would require a major shift in global economic power, financial infrastructure, and political alliances, which is unlikely to occur suddenly.