In real terms, the Gretchenfrage arising from the pandemic is how value can be accrued and stored over time if there is excessive risk in markets due to ubiquitous uncertainty.[1] Tout court, a global liquidity crisis does neither bow to notions of ‘Tit for Tat’ nor can it be set aside indefinitely—not even by G20 nations. Attempts of remedying this crisis like the Great Financial Crisis of the year 2008, by virtue of quantitative easing, might have not entirely faltered but become increasingly edentulous due to lockdown-induced lack of monetary velocity.
Precisely, the wraith of inflation and civil scepticism vis-á-vis governmental capabilities of alleviating economic distress on its citizens, not only harms democratic structures figuratively, more delicately, it actually led to citizens summoning monetary alternatives to preserve purchasing power by means outside of regulated financial markets. This bifurcation of storing value in legacy and alternative ways is pivotally shaped by the protagonist of our time, an aggregate that goes by the name of ‘digital token’. Precisely, the stress-ratio between tokenized, privately issued virtual currencies and public legal tender—that incrementally incorporate the same disruptive technology at this very moment—caused the latter’s temporal loss of market pre-eminence within its proper sovereign territories. Succinctly, at least for the time being, a bitter taste lingers among regulators, since, one of the strongest pull factors on behalf of DLT-based virtual currencies is their decentralised nature ie little to no control by central-, commercial- and retail banks.[2] Derived from these prior elucidations, it is inexorable for states to cooperate in rethinking the international monetary system as a whole in order to reinstigate trust in the wake of a pandemic.
That being said, relating to holistically mitigating global economic risk, a diligent answer must be given by the International Monetary Fund, an entity that serves as beacon of stability, retorting protectionism that had unequivocally sparked-off World War II.[3] In principle, its top priority lies in stipulating a rules-based system that fosters multilateral cooperation instead of national isolation in times of recession—lastly, shored up by conceiving the Special Drawing Right.[4] Notwithstanding the Fund’s relevance in the global financial system, its monetary clout diminished significantly with US American repulsion of the greenback’s convertibility to gold under US President Richard Nixon, that had subsequently led to amendment of the IMF’s Articles of Agreement and introduction of a flexible exchange rate regime with free floating exchange rates.[5] From that point, until the GFC in 2008, the Fund primarily became a creditor to developing countries through its lending facilities but has reclaimed a vital role in circumventing global market failure as a lender of last resort in the climaxing sovereign debt crisis.[6]
While it might seem paramount to primarily scrutinize the substantive scope of the monetary legal fiat, that derives its value from a basket of currencies,[7] the specificities regarding its allocation among the nations of the world are even more crucial.[8] Precisely, the necessary assessment follows a meticulous routine pursuant to the notorious ‘quota formula’ that designates a member’s relative position in the world economy and entails general quota review undertaken in regular intervals that must not exceed 5 years.[9] The conclusions drawn from this masterpiece of int'l governance are equally awe-inspiring as they are mind-boggling, hence, frequently experiencing scrutiny and scepticism in the political arenas of the world.[10]
-Dom T. Ghazan
[1] André Nollkaemper, ‘Universality’ in Anne Peters (ed), Max Planck Encyclopedia of Public International Law (OUP 2011) para 36. From the perspective of modern international law, it is clear that a system of international law that succumbs to hegemonic command or deliberately discriminatory policies cannot be considered universal and is therefore inherently flawed.
[2] Mike McGlone, ‘Global Cryptocurrencies 2022 Outlook’ (Bloomberg 2021). Notoriously, analysts foresee that cryptocurrency may be the primary beneficiary if declining equity prices pressure bond yields and incentivise more central bank liquidity to offset the crisis.
[3] Sabine Schlemmer-Schulte, ‘International Monetary Fund (IMF)’ in Anne Peters (ed), MPEPIL (OUP 2014) para 1. In a nutshell, 44 nations conceived a system that has mitigated risks of a repetition of the great depression in the interwar period and consequent armed conflicts of international scope significantly. Precisely, by setting up the first multilateral monetary system as the linchpin to liberal trade among nations.
[4] Christopher Wilkie, Special Drawing Rights (OUP 2012) 1. Succinctly, SDRs were introduced by the first amendments to the Fund’s Articles of Agreement in Rio de Janeiro, dating back to 1967. Ever since their inception, they fulfil the special purpose of supplementing existing reserve assets, whenever the need for issuance of such reserves arises. As a world reserve asset, they have even been conceived to technically fulfill the noble purpose of a means of exchange, should at least eighty-five percent of IMF members deem it desirable to have it claim such a role. For full-fledged intricacies pertaining to SDR-issuance see International Monetary Fund, ‘Articles of Agreement’ [2020] Articles XV to XXIII.
[5] cf Atish Rex Ghosh, ‘From the History Books: The Rethinking of the International Monetary System’ [2021] IMF Blog: Insights & Analysis on Economics & Finance.
[6] ibid. The Fund’s lending facilities are denominated in SDR, also referred to as XDR pursuant to the ISO 4217 standard.
[7] ‘SDR Valuation’ <https://www.imf.org/external/np/fin/data/rms_sdrv.aspx> accessed 28 August 2021. (‘…The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.’)
[8] Rosa Lastra, International Financial and Monetary Law (2nd edn, Oxford University Press 2015) supra note 13.54. In principle, the incremental amalgamation of macro- and micro-prudential supervision, blended with an international unit of account, enhance a sturdy foundation for sustainable financial stability and pertinent longevity. Relating thereto, the SDR as IMF liquidity takes a pivotal role in ‘avoiding economic stagnation and deflation as well as excess demand and inflation in the world’. It can either be allocated or cancelled in order to meet global liquidity demands, hence, enabling appropriate response of international scope to economic pitfalls.
[9] The pivotal traits of IMF action are its member’s assigned quotas and resulting subscriptions. Hence, a change in quota can only be undertaken under certain conditions see ‘IMF Quotas’ (IMF) <https://www.imf.org/en/About/Factsheets/Sheets/2016/07/14/12/21/IMF-Quotas> accessed 1 September 2021.
[10] ‘Extension of the Periods for Consent to and Payment of Quota Increases’ (International Monetary Fund 2022) IMF Staff Reports. Due to pandemic-induced market environment, twice in a row, quota review has been adjourned. Precisely, from June 2021 to June 2022 and now from June 2022 to June 2023. A mechanism permissible upon discretion of the Executive Board pursuant to Board of Governor’s Resolution No. 66-2 cf ‘Extension of the Period for Consent to Increase Quotas Under the Fourteenth General Review of Quotas, the 2008 Reform of Quota and Voice, and the Eleventh General Review of Quotas’ (International Monetary Fund 2015).
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