An exerpt from the International Monetary Fund. More on this when I have time.
http://www.imf.org/external/np/pp/eng/2010/041310a.pdf
INTERNATIONAL MONETARY FUND
Reserve Accumulation and International Monetary Stability:
Supplementary Information
Prepared by the Strategy, Policy and Review Department
In collaboration with the Finance, Legal, Monetary and Capital Markets, Research and
Statistics Departments, and consultation with the Area Departments
Approved by Reza Moghadam
April 13, 2010
V. A GLOBAL CURRENCY: INSTITUTIONAL CONSIDERATIONS
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1. Institutional underpinnings. Setting up a bancor-based system requires resolving technical and governance challenges related to the creation of a global central bank with a clear policy objectives and instruments, along with a financial and governance structure that ensure its credibility and legitimacy. These challenges are described below. A key hurdle is political, although that applies to all other solutions for systemic reform.
Global central bank. The global central bank that issues bancor would need to earn a very strong reputation and credibility. Appropriate rules and governance are essential, and the bank should have a strong balance sheet. Members would need to pledge to back up the liabilities of the bank and annually cover any losses incurred in its operations. Such credibility could be bolstered by capital subscriptions from member countries at a level that ensures the highest possible credit rating (“AAA”). Member subscriptions could be similar to IMF quotas and determined by a transparent formula that reflects relative weight in the global economy. Profits (and seigniorage) could be distributed to members according to the capital subscriptions.
Policy objective. Issuance of bancor, or more generally the implementation of monetary policy, could be targeted towards stabilizing the price of a representative basket of goods and services (and perhaps assets). An international standard basket
could be defined, with weights on the baskets of different countries on the basis of their respective GDPs. The stable value of bancor would be defined in terms of this international basket.
Instruments. The central bank would conduct market operations, buying and selling bancor-denominated securities issued by member governments, in exchange for bancor issuances and bancor-denominated deposits at the central bank. These
operations could be distributed across markets, perhaps in proportion to countries’ economic and financial weights. The amount of operations by market would be determined by the overall objectives and fined tuned with experience, with due
consideration to balancing the trade-off between ensuring adequate liquidity provision, including in times of stress, and maintaining the store of value of bancor.
Governance. The governing body of the central bank would be made up of representatives of national governments or central banks, whose voting shares reflect the shares of their economies in global GDP, trade, and finance, as well as the
domestic usage of bancors (since those with relatively more bancor usage would want to have a greater say). These shares would need to be adjusted periodically for differential growth. Representatives should have strong monetary policy credentials,
and the governance structure designed to protect the bank’s operational decisions from political influence and maintain credibility. Accountability structures of the bank to its membership would also need to be put in place.
Transition to bancor-based system. A fiat declaring sole use of bancor in member countries, particularly systemically important ones, would launch the bancor-based system once the above technical and governance matters are resolved. In its absence, however, sustained public sector support for enhancing bancor’s use will be necessary akin to the proposals outlined in the SDR system above, until such time a critical mass of bancor and bancor-denominated securities is achieved. Alternatively, a transition from an SDR-based system could be envisaged, with eventual conversion of SDRs to bancor.