The widespread use of the United States Dollar (USD) for the global oil trade and the USD-currency peg practiced by most Gulf oil-exporters constrains their monetary and to a certain extent foreign policy independence. In parallel, monetary inflation, economic slowdown and a growing debt burden in the United States continues to raise questions on the sustainability of the dollar as a store of value. Yet attempts to displace the petrodollar have so far seen limited success, despite China’s significant efforts to internationalize its own currency and to settle oil purchases using the Renminbi (RMB).
This report argues that in the current global monetary system underpinned by fiat currencies, Gulf-based oil exporters with Saudi Arabia at its helm could become the architects of a new digital currency backed by oil and governed by a regional multilateral institution (hereafter termed as MCDC for Multilateral Collateralized Digital Currency). The MCDC would provide major benefits to its sponsors, including facilitating trade, reducing financial risk and crucially conferring them more influence on the global stage. It would also enable them to chart a politically independent path which would look after their self-interest rather than accommodate the one of the United States or China. The combination of real collateralization and robust institutional governance would provide much needed credibility to the concept, in an era where alleged fiat-collateralized “stablecoins” have proven anything but stable, as illustrated by the collapse of the Terra blockchain in June 2022.
The MCDC could eventually play a significant role in global oil-trade: any country – including oil exporting countries with national currencies pegged to the dollar – would be able to hold the MCDC in its national accounts. Participating oil exporting countries would be able to sell a growing share of their oil in that currency, avoiding the global financial infrastructure linked to the USD, while the multilateral institution governing the digital currency could provide financial support to countries in need by extending international loans in that currency. In turn this would enhance the influence of the countries behind the multilateral institution. Given the independence of the institution governing
the MCDC, interest rates would not be tied to the interest rates of established global reserve currencies, enabling the institution to lend the MCDC at competitive rates compared to traditional international financing and lending institutions, with a potential use for development finance to other countries.
Like-minded oil exporters could we well served to design and test an end-to-end governance mechanism for the MCDC, including but not limited to robust mechanisms for collateralization, issuance and currency redemption.
