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Special Drawing Rights: An Explanation of their Current Role and Future Function Cora Pettipas and Halia M. Valladares Montemayor The objective of this paper is to analyze alternatives to global currencies; as well as, the potential new currency based on the International Monetary Fund’s Special Drawing Rights (SDRs). The nature of SDRs is then described and the potential future use of them as a currency to stabilized currency risk in global trade. Countries then retain their own currencies and set their own monetary policies. The SDR allocations could be based on current account and balance of trade surpluses and could be called a current account SDR system to make the SDR a true store of value, and relatively stable. Introduction The world economies have become globalized. All our economies are highly interconnected, creating a need for a sound global international monetary system to facilitate global commerce. With the pressures multinational companies, as well as trading blocs, markets have become more integrated. Expansion of markets from the development of regional trade agreements such as NAFTA, and the European Union has decreased tariff and non tariff barriers to trade. A further reduction of physical barriers has been assisted by the digital age and explosion of technology in all aspects of international business such as international outsourcing of services, to procurement and supply chain management. The emergence of the global economy has increased trade between countries. This trend is greatly necessitating the emergence of global governance agencies and mechanisms. This explosion of global trade and commerce has put pressure on the monetary system that still is exhibiting strain. There is an increase in cross border financing by multinational corporations seeking the most favorable financing rates. There is also increased interdependence of the financial markets, with increases in partnerships between exchanges of different countries aiding in debt and equity financing for multinational companies. In addition, companies are now structuring themselves as transnational, with subsidiaries in various countries and markets. There is also an increase in joint ventures and business partnerships of companies across borders (Griffin, 2006). All of these emerging international business trends have been placing increasing strain on the home countries balance of payments and current accounts coordination. The current account for each country is an indication of the flow of value and trade. Some countries have a trade surplus meaning that the net capital outflows from that ___________________________ Cora Pettipas, CFP, FCSI, Ph.D. Candidate, Swiss Management Center University Halia M. Valladares Montemayor, Ph.D. Associate Professor, Mount Royal University country are greater than the inflows. Other countries are considered to have a trade deficit where the opposite happens, the countries net imports are greater than the net exports. Traditionally, it was accepted that trade surpluses were good and trade deficits were bad for the home country in terms of prosperity and job creation. However, as we continue to globalize and integrate our economies, it is becoming clearer that either a surplus or deficit is negative, as if one country has a surplus; another has to have a corresponding deficit (Cohen, 2008). After the Asian currency crisis, the Asian countries scrambled to eliminate their current account deficits. The result of this was the United States becoming the ‗deficit of last resort‘ because they can afford to take on large trading deficits as their currency is still the most popular global currency reserve asset (Stiglitz,2009). China took the lead in what has been termed a ‗savings glut‘ by Asian countries contributing to the global monetary imbalance. In doing so, they built their currency reserves in US dollars. It is estimated that China currently holds two trillion USD in their reserves (Anklesaria Aiyar, 2009). The U.S. can absorb the current account deficits as they happen to produce the currency that is the most popular for global trade and reserves. The IMF estimates that 64% of all foreign reserves are USD denominated (Humpage, 2009). In addition, the USD is still the billing currency of 45% of international transactions. However, now that the USD does not have a fixed value, coupled with consistent U.S. deficits and multiple quantitative easing measures, there are concerns that the dollar will continue to lose its value (Bergsten, 2007). These concerns are advocated by the BRIC nations, especially China as they are overexposed and need diversification away from the currency risk of deflation of the U.S. dollar (Anklesaria Aiyar, 2009; Xiang, 2010). The objective of this paper is to analyze alternatives to global currencies; as well as, the potential new currency based on the International Monetary Fund‘s Special Drawing Rights. The nature of SDRs is then described and the potential future use of them as a currency to stabilized currency risk in global trade. This is an exploratory and descriptive research based on secondary data from reliable sources source as World Economics, Journal of international Affairs, Journal of Financial Management & Analysis to name a few. THE IMPORTANCE BUSINESS OF A GLOBAL CURRENCY IN MEASURING INTERNATIONAL Multinational companies go to great lengths to neutralize the currency risks brought about by international commerce and trade. Most currencies are allowed to float with market forces. The currency price is determined by supply and demand market forces. In addition, sovereign nations can manipulate the supply of their currencies using monetary policies to protect the economic interests of their country (Bergsten, 2007). Companies have translation and transaction risks as a result of doing business in multiple currencies (Griffen, 2006). Multinational companies that already operate on thin margins can have a quarter‘s profit washed away by even a small change in value of un-hedged currency transactions. There are a few terms that are important for the understanding international trade. The balances of payments for a country are a summation of all the capital inflow and outflows from goods, services and capital. This is used to measure the trade balance of a country, which captures if a country is a net importer or exporter of goods. A net importer consumes more goods than it produces, and net exporter produces more goods than it consumes. Alternatively, a current account is a broader measure of the import and exporting activity of a country as it includes trade of goods, services, royalties, patents, employee remuneration, travel and tourism, gifts and grants. The current account is a more accurate and holistic account of a nation‘s economic balance (Butler, 2010). To add to the complexity of measuring international trade and business activities, each country has its own measure of economic value, or currency. Traditionally, the international monetary system went from a fixed exchange rate system where the values of hard currencies were fixed to a relatively nonexpendable resource like gold (or silver). After the fall of the gold standard, major national currencies were un-pegged to a fixed commodity of precious metal and were allowed to float with free market forces (Thakur, 1994). This will be discussed more in later sections. These new currencies are called fiat currencies, as they are not backed by any fixed commodity or resource, just the general ability for sovereigns to extract taxation from their populace (Butler, 2008). A fixed, nonvolatile currency value is very important for international business (Thakur, 1994). When a company prices and invoices in one currency, it can stabilize its accounts payable and accounts receivable in a predictable manor, knowing the business profitability of operations as long as sales projections are accurate. When a company does business in multiple countries and multiple currencies, each with a precarious floating value, predicting profitability of operations becomes much more challenging (Griffin, 2006). The company either has to incur the expense of hedging or they have to accept the volatilities of international inflows and outflows. This is why accounting, pricing and invoicing in one currency is ideal (although not always practical) to eliminate currency risk. The next section will explore potential one currency models. Contenders for the Global Currency Status THE STATUS QOU: THE AMERICAN DOLLAR The U.S. dollar has been the dominate currency in global trade since 1944, replacing the pound sterling. The U.S. dollar was pegged to gold until 1971, when 42 USD could be converted into an ounce of gold. The U.S. treasury was not able to meet this conversion obligations and therefore un-pegged their currency from gold. Since then their currency, as with most global currency, has been able to float with market forces of supply and demand with no constraining limit on the production of the USD (Byrne, 1982). Currently, The United States is in poor financial health, increasing the volatility and risk associated with holding the dollar as a reserve currency, or using it for international transactions (Rowley, 2011). The U.S. had debt to GDP ratio of 40.8% in 2008, with a projected debt to GDP ratio of 70% in 2009 as they continue to operate in a deficit. As the United States continues to monetize their debt, global fears of inflationary pressures will devalue the USD (Stiglitz, 2009). Other reports suggest that at the current level of taxation (income) and expenditures (spending) the U.S. debt to GDP ratio is projected to reach 100% in 2023, and 200% by 2038 (Burman, 2010). This large of a debt to GDP ratio happened once before in the U.S. during the second world war, but this is expected to happen in times of crisis, as opposed to the current debt being created from entitlement spending (Amaral, 2010). If a household managed their money like this, they would be in default and progressing towards bankruptcy. The U.S. budget deficit in 2009 was 9% of GDP, which is 3 times the European Union limit of 3% for European countries (Welch, 2010). The second major concern in continuing to use the USD for the global currency reserves is the fears that the U.S. government will not fight inflationary pressures, as that would decrease the real value of debt obligation they now hold. This would not be without a cost for the U.S., as foreign creditors would demand higher interest rates from the U.S. Moody‘s Investor Service has contemplated a downgrade of U.S. Treasury bonds, which would drive yield demands higher. This is a complicated situation both for the U.S. and for its debt holders as the U.S.‘s major debt holders (excluding intragovernment debt)are also its major importers, like China, Japan, Oil Exporters, and Russia (Burnam, 2010). These major debt holders are also depending on U.S. consumption to maintain their own economies and would ideally like to maintain their exports to the U.S. at previous levels. One strategy China and Japan are undergoing is buying inflation protected US denominated assets as an alternative to traditional Treasury Bills, which will protect against inflationary pressures. This product does protect against inflation, but not exchange rate risk (Stiglitz, 2009). The third major concern of having the dollar as the international global key currency is exchange risk (Bergsten, 2007; Rowley, 2011). With the USD having a dual role as a key currency as well as a sovereign currency, it has a conflict between global interests and sovereign economic interests. The U.S. is the largest net debtor in the world (Alessandrini, 2009). A systematic devaluation of the dollar (as other countries have done) would make US exports more competitive imports less so. Also, it would facilitate foreign direct investment into the U.S. creating job growth and counteracting the deindustrialization that the strong dollar has had on the U.S. This could facilitate an economy based on production and savings as opposed to consumption and leverage, hopefully returning the U.S. economy to balance (Ussher, 2009). This would be great for domestic policy, but a devaluation of the dollar would also reduce the value of the USD denominated global reserves, destroying the value those countries reserves and their hard earned savings. One currency cannot act as both a sovereign currency as well as have the ―exorbitant privilege‖ of producing the global currency, as there are inherent conflicts built into this system (Alessandrini, 2009, pp 52). With the increase in global commerce paired with the de-pegging of the U.S. dollar to the gold standard, there needs to be a new currency that can be used for reserve funds to help support balance of payments and current accounts around the world. As Joseph Stiglitz (2009) as theorized, the system in place creates a reverse foreign aid, where developed countries who should be saving and lending are borrowing and developing countries who should be borrowing and spending are lending at low U.S. treasury rates. A global currency is also needed to price fix for commerce to decrease risk of currency exposure and to simplify trade. Due to the factors discussed, the US dollar as the key currency is no longer desirable for global markets (Bergsten, 2007; Rowley, 2011). THE NEW CONTENDER: THE EURO The most prominent alternative for a reserve currency is the Euro, which is now the second largest trading currency in the world (Cohen, 2008; Cooper, 2010). It is the standard currency of 17 countries in the European Union (EU). It started as an accounting quasi currency in 1979 called the European Currency Unit (ECU) (Thakur, 1994). The ECU was valued as a basket prorated based on 11 participating European countries currencies. It was replaced by the Euro on a 1:1 conversion basis in 1999, and then entered circulation as a full currency in 2002. For business operating in Europe, the Euro eliminates currency risk as it can produce and sell products and services in the same currency unit. There has been a criticism of the Euro, as the participating country‘s monetary systems are now linked through the European Central Banks (Cohan & Subacchi, 2008). Each country in the European Union has conceded autonomy and has to operate their financial affairs within the constraints of the rules of the European Union (Cohen, 2008; Wilde, 2009). The Euro is still in its infancy. There were initially high hopes that the Euro would fast replace the U.S. dollar as the world reserve currency (Cohen, 2008). However, it devalued just after being launched and there are still concerns about its future. In Europe, the Euro has surpassed the dollar as the most common invoice currency. It is also the second most traded currency on foreign exchange markets at this time, at 20% of the daily transactions. The USD is still prominent at a 45% share. However, the Euro has advanced the USD in international bond issues. There is also demand from central banks, especially in Asia; to diversify their reserve holdings out of USD into Euros as it they are now seen as a better store of value than the USD (Alessandrini, 2009). Even though the Euro is a strong international currency, it is doubtful it would make the best official reserve currency. Even if it did, it would be plagued with the same innate conflicts as the USD in terms of having a dual purpose: being a local (continental) currency as well as a global one. The Euro would have to satisfy two competing and sometimes contradictory purposes of being a stable reserve currency and enhancing property of Europe. Although the currency lacks the power and influence the pound sterling once enjoyed, the Euro appears to have a strong future and the strength of Europe united seems to be more forceful than the individual countries like Germany and France. United, it rivals the U.S. in terms of GDP, production, population and trading volume (Cohen & Subacci, 2008). . OTHER CURRENCY OPTIONS Since the gold standard broke down, there are three basic alternative discussed in currency literatures: a well used fiat national currency, a commodity based currency, or a global fiat currency. The Gold standard is the last popular currency based on a precious metal, a form of commodity currency. The gold standard fell in 1972 when countries turned to fiat or floating currencies. Gold was an ideal asset to use as currency at the time, as it was malleable and limited in quantity. Although some economists call for the return of the gold standard, it is unlikely (Wessel, 2010). It collapsed mainly because the supply could not keep up with burgeoning trade. In addition, the central banks of the world did not always abide by the rules of the gold standard. Distribution of paper notes within the limits of the gold reserves, and other fraudulent practices (Ussher, 2009). William‘s key currency proposal was popularized at the Bretton Woods conference in 1944 as an alternative to the gold standard called for one key currency or a basket of currencies as the best alternative. At the same time, Keynes called for a convention called the Bancor which was an accounting currency that would work as a clearing house for countries to facilitate trade. The Special Drawing Rights (SDRs), a creation of the International monetary fund has characteristics of both, and will be discussed further in this paper. Other than the most used national fiat currencies, an interesting, albeit unpractical, alternative for the global reserve currency has been put forward: a commodity based currency. A currency based on an underlying basket of commodities was an idea brought forward by Nicolas Kalder as a way to make the international currency system more fair and disciplined. This could be built on John William‘s idea of a ―key currency‖ and John Keynes‘ idea of the proposed Bancor. The commodity based currency proposed that each unit of currency be backed by a physical basket of commodities warehoused solely for this purpose. Selected commodities would be stored including raw materials, edible oils and precious metals to back the value of the currency note. There would be copious rules and regulations about which commodities would be included, inventory management and turnover. Therefore, the note, or currency would literally have a store of value backed by these commodities (Ussher, 2009). As currency is the medium of exchange so that one can distribute the timing of production of a good or service with the consumption of it, this alternative is more of an intellectual idea than a pragmatic one (Thakur, 1994). However, the idea of a currency being backed by something of tangible value as opposed to Fait currency is an appealing one. As central banks print fiat money that is solely based on the future tax revenue of the populace is precarious as it sets no realistic and controllable limits on the money supply, leading to possible devaluation and inflation. Special Drawing Rights THE BACKGROUND OF SDRS An alternative global reserve currency, or key currency, could be developed from Special Drawing Rights (SDRs) which are now used as an accounting currency by the International Monetary Fund (IMF). The IMF is a global governance organization that also came out of the Bretton Woods Agreement. It is widely debated what a Special Drawing Right is, which is really a debate of what we determine as money or a means of exchange. The IMF was developed to oversee the international monetary policy as there were fears that countries would go back to protectionist economic policies that were not conducive to trade and thus could lead to another great depression (Griffin, 1982). To prevent this, SDRs were created to help implement the IMF‘s objectives to facilitate trade by making resources temporary available and to correct the balance of payments. Each member country paid a quota in gold to contribute to the IMFs initial reserves. The size of the quota was determined by the countries influence in the IMF through voting rights as well as determined the countries borrowing power from the IMF denoted as Special Drawing Rights (Cohen, 2008). After the un-pegging of the U.S. dollar to the gold standard, the IMF decreased in relative importance as the floating rate exchange system for fiat currencies was established, and the fear that the world would run out of USD was unfounded and also eroded the need for foreign exchange reserves (Anklesaria Aiyar, 2009). It was not until the global economic crisis in 2008 that the IMF gained attention as a potential solution to the global financial crisis, particularly the liquidity predicament. The G-20 summit in April 2009 restored the IMF to global prominence. A general allocation of 250 billion new SDRs were issued by the IMF as a short-term solution (Griesgraber, 2009). Special Drawing rights are not intuitive to understand. Initially, they were pegged to a fixed amount of gold equal to one USD (Humpage, 2009).SDRs have been classified as a unit of account, a derivative, a debt, an asset, or a quasi currency Special drawing rights were created by the IMF in 1969 as a potential reserve currency to increase liquidity and facilitate a new global currency (Hood, 1983; Wessel, 2010). There are currently 308 billion SDRs in existence (IMF External Relations Department, 2010). This makes up about 4% of the world reserves (Thao, 2009). At the time, the world had two global supply reserves, gold and the U.S. dollar (Byrne, 1982). The amount of gold was strained under the amount of global trade and funds needed. SDRs were meant to be a solution to the expected global shortage of US dollars and gold. Special Drawing rights are also a Unit of account, as opposed to a currency. SDRs represent a claim on the IMF‘s reserve assets and are the official unit of account (Byrne, 1982). The IMF‘s SDR general allocations are by approved by the Board of Governors. The latest and largest general allocation of SDRs by the IMF was in 2009, of 250 billion. General SDR allocations simultaneously increase a country‘s share of SDR holdings and allocations. The holdings are considered an asset, and the allocations are a corresponding liability. The latest allocation was in response to the 2008 global financial crisis. This new allocation was to create liquidity in the global market system. It has been a criticism by advocates of developing nations that 170 billion of the 250 billion were allocated to richer countries because it is based on quota. Sub-Saharan Africa, for example, received 11 billion SDRs (Jellema, 2010).The United States got the largest SDR allocation, as they have by no coincidence the largest voting power at the IMF, almost 17%. Having SDRs credit to the accounts of each country increases the resources that country has to draw on, and decreases the need to hold mass amounts of reserve currencies for global trade and currency fluctuations. Special Drawing Rights are argued to be a derivative, meaning that its value is derived from other currencies. This is similar to the European Currency Unit (ECU) was before it was replaced by the Euro in 1999 (Hood, 1983). The ECU was an accounting currency based value of underlying European currencies of 12 participating countries at the time (Allen, 1993). SDRs are valued based on a basket of four global currencies: The U.S. dollar (44%), the Euro (31%), the Japanese yen (11%) and the British Pound (11%) (Bergsten, 2007; The Pak Banker, 2011). This means that 1 SDR can be converted into these for currencies in their respective proportions (Alessandrini, 2009). The value is based on a five currency basket (the Euro used to be the Deutschmark and the French Franc) that is readjusted every five years (Ekpenyong, 2007). The IMF decided to only use the top four hard currencies as these are currently the most important currencies in international trade and payments (Daniels, 2011). They are seen as more stable and less volatile to price fluctuations. Also, it creates simplicity to the unit value that can be easily transferred to its underlying currencies as the major concern for the finance sector is liquidity. Using all the 120 participating IMF countries currencies would be more accurate pricing, but would increase the complexity of the SDR and decrease the liquidity. As the second largest economy in the world, the Chinese Renminbi is noticeably missing from this basket, as presently it is not considered an international currency (Cheung, 2010; Xiang, 2010; IMF Strategy, Policy and Review Department, 2011). THE SDR AS A CONVERTIBLE INTEREST BEARING NOTE Special Drawing Rights can also be considered a convertible interest charging short term line of credit. If the country‘s SDR allocations exceed their SDR holdings with the IMF, then they are charged interest on the difference. Nations can convert part or all of their SDR allowable allocations to the underlying basket of currencies (or market equivalent of one currency) for use in their economy as an alternative to holding or drawing upon their official reserves. For example, if a country can withdraw 1 billion SDRs from its allowable allocations over and above its SDR holdings from their account with the IMF. The SDRs are converted to American dollars at the current rate of 1 USD = 0.628219 SDRs (IMF External Relations Department, 2011). The exchange rate is based on the current market rates of the 4 underlying currencies. This means that the country will receive 1.563 billion dollars in U.S. currency to settle its current accounts or provide liquidity to its economy. The country will then pay back the funds borrowed which will be converted back to SDRs at the IMF. While the country‘s SDR‘s were cashed in, they are paying a current interest rate of 0.39%.If the country used the SDRs for 182 days, then their interest cost (based on current rates) would be $3,048,366 million USD or 1,950,000 SDRs. The interest rate is a prorated rate based on short term debt instruments in proportion of the underlying currency basket. Alternative to the above example, Special Drawing rights can be a short term interest bearing note, an asset for countries whose SDR holdings exceed its SDR allocations. When this happens, the country receives a rate of interest in SDRs equivalent to the short term lending rate discussed above, (IMF External Relations Department, 2010). The lack of spread on the SDR lending and investing motivates drawing SDRs and penalizes saving them. With a cumulative general allocation of 8 billion dollars, for example, the SDR holdings would be 8 billion and the SDR allocations would be the same amount, so there is zero net effect on cash flow. Instead of building up a country‘s reserves to handle balance of payments and other short term liabilities, it can access its SDR allocations, similar to a checking account at a bank with a very low rate of interest. The allocation limit would be the overdraft amount, the holdings and allocations would initially net to zero. If you overdraw your account, you are charged a current rate of .39% interest, and if you have a surplus in that account then you get paid .39% on the account. In practice, the amount owed or earned would depend on the timing of the balance of payments going in and out of the account, ideally netting to zero. Lastly, SDRs can also been seen as a quasi currency. It has also been argued that price; as opposed to currency is what is important in international contracts. Although not a hard currency, some countries and multinational companies have taken the initiative to price their products and services in terms of SDRs. The legislated Rotterdam rules (2009) limit the liability of carriers‘ product value in terms of SDRs as opposed to any one national currency. The Hague-Visby and Hamburg Rules use SDRs to measure package limits, as does the Montreal convention for over limit baggage on international aircraft carriers (Marling, 2010). The Future of Special Drawing Rights There are some substantial barriers to the SDR becoming a reserve currency. The major barrier is the United States, who has almost 17% voting share of the IMF. Any major policy to be approved takes 85% majority, to the U.S. essentially has veto power as long as it wished to block the SDR as a reserve currency to try and preserve the dollars status (Bird, 2010). Second, it has been argued that the SDR cannot become a currency, as the IMF does not have the ability to tax its populace (Anklesaria Aiyar, 2009). It is true that the IMF does not have the direct ability to create revenue through taxation. However, the members of the IMF, the countries themselves, do have that power. So the IMF does have the indirect ability to create revenue through taxation, just like the fiat currencies of the Euro and the dollar. Not to suggest that the global populace have another tax levied unto them, but that the taxation powers are there indirectly through IMF ownership. Thirdly, as with Mayard Keynes idea of the Bancor, countries still admonish the idea of giving of independent monetary policies through use of their printing press. (Anklesaria Aiyar, 2009). This monetary policies influence foreign exchange markets as well as intervene in business cycles for the purpose of increasing prosperity for the country‘s populace. Oddly, the main supporter of the increased role of the SDR is China, as well as the rest of the BRIC nations (Kenen, 2010). This is curious, considering the next emerging fiat currency would most likely be the Chinese Yuan, although it is not considered an international currency at this time (Griesgraber, 2009; Cheung, 2010). The idea of an IMF substitution account, or open ended SDR denominated fund, is being promoted by China‘s governor Zhou Xiachaun. China‘s support has been criticized as being self-serving (Bird, 2010). Zhou also states that he would like a global currency that is, “disconnected from economic conditions and Sovereign interests of any single country” (Humpage, 2009, pp 1). Zhou believes that the current system has lead to the imbalances and the current financial crisis, mirroring what was said by Keynes in 1944. China would like to diversify its reserve assets from the USD, to the SDR, which is only 44% USD. The criticism with this account is that it would transfer the USD currency risk from China to the IMF. One of the major drawbacks to SDRs currently is the lack of understanding of their nature. SDRs lack simplicity. Are they money, or are they credit? When people look at any fiat currency, the same could be argued. Money is an agreed upon medium to transact goods and services. Currency is like a battery, it stores value from the transference of one type of energy to the other. When a worker receives their paycheck, it is stored as a monetary amount until it is transferred, or exchanged into food, shelter, and gas, etc. Simplistically, if the employer paid the worker for his services in shelter, food and gas then there would be no need for money. This money is stored value readily transferred into other energy once used in a transaction. Being seen in this example, money is an asset to the worker and a debt from the company. Currency in and of itself is not an asset or liability as it does not generate wealth or take from it unless transacted. Money stores value, and is a unit of account readily acceptable by markets. As an accounting currency for the IMF, it does have a unit of measure. THE VISION OF THE INTERNATIONAL MONETARY FUND The IMF has long term reforms in mind for the SDR, subject to approval of the IMF as well as changes to its articles of amendment. They see the SDR in the embryonic stages of a global currency that could be used as the main reserve currency. To do this, SDRs needs to have as a unit of account, a store of value and a means of payment, as that is the true measure of a valid and workable currency. At this current time, it is a unit of account and has a limited store of value (Cooper, 2010). “In the longer run, if there is political willingness to do so, these securities could constitute the embryo of a global currency. Of course, this longer term vision is highly hypothetical and support for the nearer term steps does not imply commitment to the longer term ones.” (IMF External Relations Department, 2010, pp 12) Some of the main proposals include the private use of the SDR, development of an SDR substitution account, and development of SDR securities. The private use of the SDR would be an interesting advancement in SDRs. At this time, there are no private market holdings of SDRs (The Pak Banker, 2011). They are an accounting currency with the IMF. As the paper discussed earlier, international laws and corporations have started pricing transactions in SDRs, but pricing is not the same as invoicing. The advantages of multinational corporations pricing transactions in SDRs, is it reduces the risk of using a single currency. When a single currency is used with companies that operate in multiple currencies, then there is always a risk of windfall earnings of deficits dues to fiat currency rate fluctuations. Even if these transactions are perfectly hedged, corporations face translation and accounting exposure. In addition, historical information on pricing and costs would be more accurate and easy to extract if one single unified currency was used. If the private sector could hold SDR notes than it would add to their ability to invoice in SDRs as well as use them as a source of liquidity. This strategy would need consent from key central banks, and could mimic what the current SDR reserves do for countries and for the private sector (IMF External Relations Department, 2010). A second expansion that is planned by the IMF is the expansion of SDR securities in the form of SDR denominated bonds. This would be an expansion on the SDR denominated short term notes that were issued in 2009 (The Pak Banker, 2011). The IMF states that this would serve two important functions. First, they would add to the supply of alternative reserve assets for central banks. Second, they could serve as a way of benchmarking for private institutions offering SDR denominated securities. These bonds, issued by private institutions, could also be utilized to meet the financing needs of multinational corporations. There was considerable research on if there was a market for this form of bond by the IMF. Simplistically put, they found there was a demand for this form of bond, but the main concern the private sector had was liquidity of the bonds. The main solution discussed was the addition of a liquidity premium of 50100 basis points, similar to what the ECU banking Association did for ECU denominated debt from 1979 to 1999. The third aspect of the evolution of the SDR would include the substitution account. This concept has gotten a lot of attention as it is advocated by The People‘s Republic of China (Alessandrini, 2009). A country could swap is foreign currency denominated assets into the equivalent value of SDRs. For China, it could swap its U.S. dollar reserve holdings with SDRs, effectively reducing its currency exposure of USD by 56% (as the SDR is currently made up of 44% USD). This would help China maintain the value of its reserve while the USD depreciates without directly affecting the market value of the USD by dumping large quantities of them on the open market. The account would be a reserve pool that is off market and would help countries (and possibly MNCs) diversify their currency holdings. There are many challenges to implementing this account, such as limitations, cost and liquidity issues for the underlying SDR currencies. However, if the SDR is going to become a global currency, this step is imperative as it facilitates utility of the currency as a means of payment. Conclusion This paper has argued that using a sovereign currency as a key currency is no longer effective as the monetary system has moved from a fixed system based, to a floating fiat system. Additionally, as central banks of the key currency sovereign would have conflicting obligations to hold the currency value as a global reserve currency, or utilize monetary policies to promote its own sovereign economy. Even if they do not, having the ‗exorbitant privilege‘ of holding the key currency can lead to a global imbalance of payments, where the country with the key currency becomes the deficit of last resort. The USD as a global reserve and key currency no longer works, as evidenced by the 2008 financial crisis. The SDR general allocations need to be reviewed before the SDR can move forward as a global currency. The IMF hypothesizes that general allocations of 200 billion every five years may work as trade increases (IMF External Relations Department, 2010). This arbitrary quota needs to be revised and further research needs to be done. This paper recommends these general allocations in addition to the substitution account. The SDR allocations would be based on current account and balance of trade surpluses. This could be introduced to make the SDR and international currency with a true store of value. It would then be restricted from expansionary monetary policy leading to inflationary periods or yet another financial crisis. Increasing SDR holdings based on the current account surpluses of countries is recommended and could be called a current account SDR system. This would help fortify the innate value of SDRs as a currency, as the allocation of holdings would be based on the accumulation of value above and beyond a country‘s consumption of value. This paper argues that currency is not an asset or debt, but a holding tank for value (like a battery holds energy) based on the production of goods and services. If a country has a surplus as does China, they get the equivalent denomination of SDR holdings (the asset portion of the SDR). If a country has a deficit as does the U.S. their holdings are either decreased or their allocations of SDRs (the liability side of SDRs) decreased. This could mean that surplus countries redeem their SDR holdings to invest in infrastructure, education and their economy. Deficit countries would be inclined to decrease their deficits or devalue their currency, and would not be reliant on the credit of surplus countries. The reason the current accounts should be used to measure value and SDR holdings is that with the lack of a fixed peg such as gold there is no natural limitation to today‘s fiat floating monetary policy. Today‘s system gives sovereigns the short term ability to create value out of nothing with the long term costs of devaluation. This current account SDR system could be used in conjunction with a two tiered monetary system that is joined by the SDR substitution account. The central banks still could print money and apply independent monetary policies within their country that would affect currency markets based on supply and demand of fiat currency. They would have the IMF SDR account with its holdings and allocations that it could draw upon for reserves. The value of each country‘s current account will be debited and credited in terms of SDR allocations. The substitution account would allow for a country to buy or sell SDRs based on its own currency value in relation to the SDRs. When a country devalues its currency or takes on protectionist monetary policy, the amount of SDRs it can purchase will be greatly reduced. Also, it would take more domestic currency to purchase SDR holdings creating an indirect punitive system for protectionist policies, facilitating global trade and commerce. In order for global trade to prosper there needs to be confidence in financial markets. The current financial crisis has impeded confidence in currency markets. This increases currency risk for businesses transacting in international currencies, or operating internationally. The current dollar based international monetary system is weak due to the floating rate exchange policy of the USD combined with expansionary U.S. monetary policy. The state of U.S. finances discussed in this paper has lead countries to be bearish on the USD, and not wanting to be exposed to its volatility. Other than the USD, other IMS reserve or key currency options were explored. The Euro is the second most prominent global currency, but is still not ready to be the global reserve currency. The Chinese Renminbi, another strong contender, has the same problem, as it is not seen as an international currency but may become one in the future, and be possible be included in the SDR basket (Rowley, 2011). Also, as China‘s governor, Zhou Xiachaun stated, there are innate problems with any one country having the great privilege of being both a sovereign currency and a reserve currency, as the interests often conflict. Other currency alternatives were explored, including the gold standard; commodity based currencies, Bancor, as well as Special Drawing Rights. SDRs are a valid alternative and their history and current functions were discussed. The political environments as well as the potential future of SDRs are speculated on. The main obstacle for SDRs other than logistics and market acceptance is the United States IMF vote. They can singularly veto the SDRs progression into a currency. The vision for the SDR by the IMF was detailed as well as some discussion about how it could be a true currency that holds value, a unit of measure and be readily acceptable as a form of payment. Future research into a SDR current account and SDR substitution account could be performed. 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