Saturday, January 16, 2016

Dr. Warren Coats (former IMF) Explains His Real SDR Proposal ** Important Read **

Recently, the Bretton Woods Committee held a webinar open to the public on the topic of the Renminbi and the SDR used at the IMF. I was fortunate to be able to watch the webinar and even pose a question to Dr. Warren Coats who was one of the speakers. Dr. Coats is one of the foremost experts in the world on the subject of SDR's having been the head of the SDR Division of the IMF (1982-1988). In recent years he has written about a proposed "Real SDR" which we covered here on this blog last year.

Obviously, when someone of the stature of Dr. Coats is talking about a potential future role for the SDR, we need to pay attention. The whole point of this blog is to watch for potential changes in the monetary system which might some day impact the average person. Jim Rickards has predicted that the SDR will some day step forward in a more prominent way in the global monetary system. If this does happen, it behooves us to learn as much as we can on this topic.

After the webinar I reached out to Dr. Coats to try and ask my question related to a potential future global reserve currency in more detail. Dr. Coats kindly replied and provided an excellent in depth response. He also granted permission to publish his email reply here. 

My original question was:

Is a digital global reserve currency feasible in the future? A digital bancor if you will?

During the webinar I could only pose the question by text message. Dr. Coats interpreted the question to be in regards to something like Bitcoin. In my email to Dr. Coats I explained that I was thinking about something like his "Real SDR" currency that could be used by everyone one around the world. Perhaps even on a mobile device. 

Dr. Coats then sent me the two email replies below which are directly quoted to insure accuracy. These emails contain some valuable insights into his proposal and I am happy to be able to present them here.


Thanks for clarifying your question, which I had not correctly understood at all. Yes, the whole world could be using real SDRs. The following paper provides more operational details:

But in brief, several approaches are possible: All central banks now have SDR accounts and could fund them to any level they want via currency board rules (buy them). In addition about a dozen other international entities can hold SDR (“other holders” such as the BIS, World Bank etc). Such accounts could be opened for the several hundred banks operating internationally, who in turn could offer SDR accounts for their customers all the way down to my grandmother in exactly the way banks now offer foreign currency accounts. Or these and other banks could open such accounts with their central banks adding an extra tier to the arrangement. 

The whole world could dollarize with SDRs or could issue their own currencies fixed to the SDR as the currency board central banks now do. Existing clearing and settlement networks could be used (which are, of course, totally digital) but new payment technologies are coming on stream and/or being developed that will probably greatly simplify them. The key thing is that what ever SDR liabilities banks offer must be credibly linked and convertible into the high powered SDRs issued by the IMF (either with 100% reserve or fractional reserve backing.) One highly successful mobile phone payment system in Kenya is 100% reserved at banks  Cayman Financial Review,January 18, 2012

Best wishes,

Here is the second email:  


I would be happy for you to add my email comments. But one clarification. The problem with allocated SDRs (the current method for creating them) is not that it keeps them “inside” the IMF. I have written else where on what I then called private SDRs, which already exist (but not many). The problem is that the amounts allocated would only accidentally match the demand and thus their use is constrained and limited by administrative rules (this does not apply to any created by banks — so called private SDRs). My proposal to replace allocated SDRs with SDRs issued under currency board rules doesn’t move them “outside” the IMF. It frees them from the need for any administrative restrictions on their use thus making them fully like any other currency and thus more attractive and useful as a reserve currency.

Best wishes,

My added comments: Again, a word of thanks to Dr. Coats. There is a wealth of valuable insight in these email replies. The explanation in the second email of how Dr. Coats proposal would "free them (SDR's) from the need for any administrative restrictions on their use thus making them fully like any other currency" was very helpful to me in better understanding this process. I have been trying to understand how the SDR could move into the real world for everyday use by private citizens. His detailed explanation for how that could work was very interesting and informative for me. I will add that it is hard to find quality information on this topic anywhere, much less directly from an expert like Dr. Coats (please note this link he provided in his email to his most updated version of his proposal)

Dr. Coats comments are very consistent with what I have learned from other blog readers here who have discussed this topic with me by email and have some expertise. I think his emails show very clearly that it is possible for the SDR to become a true global currency used by everyone at some point in the future. Modern technology could be employed in the process as well (see Dr. Coats link). 

I also think Dr. Coats comments are very supportive of Jim Rickards' view that the SDR could take on a much more prominent role in the future in the event of another major global financial crisis. Given all that, it's probably a good idea to learn as much about SDR's as we can.

Additional added note for readers: Because this is one of the most significant articles I have run on the blog, I will leave this article at the top of the blog until Monday and add it to the permanent page of links to SDR articles here on the blog

Please encourage anyone with interest in this topic to read this article. You simply will not find a better source for information on SDR's than Dr. Coats in my view. Also, a thank you to Jim Rickards for a retweet for this article on his twitter feed. Another thank you to Willem Middelkoop for his retweet. Here is a deeper dive into Dr. Coats proposal. Here is a followup interview with Dr. Coats on his proposal. Here is Dr. Coats new article calling for the AIIB to issue bonds using SDRs.



  1. To me the concept of any fiat currency, SDR or dollar or any thing else is not the logistics it is the corruption they cause. It is only a matter of time before those that understand the system manage to bribe those who control the creation of the currency. It is not liquidity or transferability of the dollar that is collapsing the system, but the corruption that has lead to massive debt and mispricing that is the issue. Non of the academics or officials want to honestly look at that aspect of non back currencies and yet it is the most important.

  2. Thank you for the comment. I get emails from a number of readers who feel the way you do about the challenges of a pure fiat system. It's an ongoing debate and it will be interesting to see how the public reacts if the current US dollar fiat system does fail at some point.

  3. Added note here: In the Q&A coming up on the blog here Saturday, Dr. Coats gives some thoughts on this topic (fiat system) which readers should find interesting. Not on the corruption angle, but still quite interesting.