By Jason Douglas 

LONDON -- Central banks should consider joining forces to create a virtual currency that could supplant the dollar's role in the global economy, Bank of England Gov. Mark Carney said, offering a novel solution to concerns about the greenback's status as the world's foremost reserve currency.

In a speech Friday to an annual gathering of central bankers in Jackson Hole, Wyo., Mr. Carney said the dollar's "domineering" place in world trade and the global financial system creates problems for policy makers outside the U.S. in managing inflation and safeguarding financial stability.

He said the right fix isn't to elevate another currency, such as the Chinese yuan, to a similarly powerful status, but instead to ensure that the global economy is lubricated by multiple reserve currencies.

"The main advantage of a multipolar international monetary and financial system is diversification," Mr. Carney said, according to a text of his prepared remarks published by the U.K. central bank.

He said that while such a system might appear distant, "technological developments provide the potential for such a world to emerge." He floated the idea of building a virtual reserve currency from a network of digital central-bank currencies, which he labeled a "synthetic hegemonic currency."

This virtual currency, underpinned by digital currencies issued by central banks, could be used to facilitate cross-border trade and international payments, easing the global economy's reliance on the dollar alone, Mr. Carney said.

Concerns about the dollar's outsize status aren't new. Though the U.S. and other Western countries' share of global economic activity has declined, the greenback remains the principal currency for settling international trade and issuing securities and the favored currency for government reserves.

Its dominance means that developments in the U.S. economy quickly ripple through to small and midsize economies across the globe, a potential headache for policy makers tasked with steering domestic growth and inflation and protecting their economies from tremors in the global financial system.

Knocking the dollar off its perch has long been discussed in global policy circles but past efforts have fallen flat. The International Monetary Fund created "special drawing rights," a reserve asset based on a basket of currencies, in 1969, but their use is limited.

Recent innovations in technology and finance have revived the idea of a widely used, global currency. Facebook Inc. and a handful of other tech giants this year announced plans to create a virtual-payments system known as Libra, potentially providing a novel way of paying for goods and services online.

In his speech, Mr. Carney said such a system could have substantial implications for financial and monetary stability, meaning it is an open question whether such a potentially important currency should be provided by the public sector.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

August 23, 2019 15:14 ET (19:14 GMT)

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