Dollar Hegemony ③ — Can Dedollarization Actually Happen?

Dedollarization is not a new story.

De Gaulle's dollar attack in the 1960s, OPEC pushback after the petrodollar system took hold in the 1970s, post-1997 Asian Financial Crisis critiques of the IMF-dollar system, China's call for enhanced SDR use after the 2008 financial crisis — dedollarization has been declared repeatedly for decades, and repeatedly failed to materialize.

The most recent wave was triggered by two events:

① 2022 Russia sanctions: Russia's ~$300 billion in FX reserves were frozen. The reality that 'the US can seize dollar assets you've stockpiled' was proved.

② 2023 BRICS expansion: Saudi Arabia, UAE, Iran, Egypt, Ethiopia, and Argentina (subsequently withdrew) were admitted, expanding BRICS to 11 nations. The Johannesburg Summit formally put a common currency on the agenda.

The IMF COFER data on reserve currency composition shows a landscape changing more slowly than the rhetoric suggests.

Over 25 years, the dollar share fell 13 percentage points from 71% to 58%. But look at what filled that gap.

The euro gained just 2 percentage points, from 18% to 20%. The yuan went from 0% to 3% — still a minor absolute level. What actually filled the dollar's space was not a specific alternative currency but 'other' — diversification into smaller currencies like the Canadian dollar, Australian dollar, Korean won, and Norwegian krone. This is diversification, not dedollarization.

China is the world's second-largest economy. Its trade volume rivals the US. The yuan was added to the SDR basket in 2016. So why does the yuan sit at 3%?

One answer: a closed capital account.

One reason the dollar is the reserve currency is that US financial markets are fully open — anyone can buy, sell, or pledge US Treasuries as collateral, borrow dollars overnight in the repo market, and move capital freely in and out.

China is different. Foreign investors face significant restrictions on buying and selling renminbi-denominated assets. Capital flows are controlled. CIPS (Cross-Border Interbank Payment System) was built as a SWIFT alternative — but its participating institutions and transaction volumes are a fraction of SWIFT's. Until China opens its capital account, the yuan cannot become a true reserve currency.

mBridge (Multi-CBDC Bridge) is a CBDC-based international payment platform jointly developed by the BIS Innovation Hub and central banks of China, Hong Kong, Thailand, UAE, and Saudi Arabia. It reached the Minimum Viable Product (MVP) stage in 2024.

The idea is appealing: bypass SWIFT, directly exchange each country's CBDC, enabling real-time cross-border payments without dollar intermediation.

But reality presents three layers of barriers:

① The trust problem: Do participating countries actually trust each other's CBDCs? Will oil exporters willingly accept yuan CBDCs? Will each central bank trust the other's system?

② Legal framework differences: When disputes arise in cross-border transactions, which country's law applies? What is the legal status of smart contract-based transactions?

③ Economies of scale: SWIFT connects 11,000 financial institutions across 200 countries. How long before mBridge approaches that scale?

After the 2022 Russia sanctions, EM central bank gold purchases surged. In 2022, global central bank net gold purchases reached approximately 1,136 tonnes — a 55-year record. 2023 remained elevated at 1,037 tonnes.

China and India were particularly aggressive. The People's Bank of China added roughly 600 tonnes to official reserves over 2022–2023. Poland, Czech Republic, Turkey, and other European EMs also substantially increased gold holdings.

Is this dedollarization? Not precisely. Gold is not a 'replacement' for the dollar but a 'hedge'. Holding more gold often doesn't mean selling dollar assets — it typically means adding gold while maintaining dollar reserves.

With no viable alternative to dollar hegemony, gold is the insurance premium against 'dollar freeze scenarios.' Growing premiums signal rising wariness about the weaponization of dollar hegemony — not the end of dollar hegemony itself.

The data speaks clearly: dollar hegemony is not declining — the way the world depends on the dollar is quietly diversifying.

The dollar's reserve share is falling, true. But the pace is around 0.3–0.5pp per year. At current speed, it would take decades to fall below 50%. And even then, it likely won't look like a single 'alternative' currency displacing the dollar.

The more realistic scenario is block fragmentation (a blockified multipolar system):
- Dollar bloc: US allies, dollar trade invoicing, SWIFT
- Yuan bloc: Belt and Road countries, yuan payment expansion, CIPS
- Euro bloc: EU internal trade, digital euro
- Neutral assets: gold, SDR, CBDC experiments

These blocks won't fully separate — they'll partially overlap and create friction: that is what dedollarization actually looks like.

And in that world, the dollar is still the most important currency. Because the plumbing is too deeply embedded to rip out.