Skip to content

The dollar remains king, while Bitcoin and CBDCs face a challenge

June 9, 2020

The global monetary system has focused on the US dollar since at least the end of World War II, when the Bretton Woods Agreement of 1944 was formalized the rise of the dollar to an undisputed domain. Control over the world’s reserve currency went hand in hand with an increase in the nation’s already enormous geopolitical influence and ability to manage large deficits at low cost.

Today, a growing chorus of experts believes that dollar hegemony could decrease. The decline in the United States’ share of world trade, the expansion of Chinese monetary power and the planned digitization of national currencies can undermine the foundations of today’s financial system.. What role could potential central bank digital currencies and decentralized currencies like Bitcoin (BTC) play in shaping the new international monetary system?

America’s exquisite privilege

One of the most common terms to refer to the great influence of the United States. in international trade it is “monetary hegemony“, which first appeared in Super Imperialism, a book by economist Michael Hudson from 1972. Almost half a century after its publication, many of the ideas articulated therein are still valid.

The dollar remains king, while Bitcoin and CBDCs face a challengeThe dollar remains king, while Bitcoin and CBDCs face a challenge

Up to this year, almost 60% of all foreign exchange reserves are still allocated to the dollar. Furthermore, Around 40% of world trade is invoiced and settled in US dollars, while 88% of world trade is represented.

The ability to mint the currency that serves as the global unit of account brings a number of advantages. in an exorbitant position of privilege. On the one hand, Since the imported goods are paid for in their own national currency, monetary hegemony is not restricted in the balance of payments. This means that you do not run the risk of losing solvency for essential imports or financing your current account deficit.

As the world’s largest debtor nation, the United States has made the most of the dollar’s position. Since all parties involved in international trade – governments, companies and banks – always need liquidity in dollars, the market has an almost unlimited capacity for new debt in dollars. Thanks to this simplified access to cheap international credit, the United States has spent far more than it could for decades.

In addition, this position of monetary dominance has an enormous geopolitical influence. By denying opposing nations access to the dollar-centered global financial system, the United States can do comparable damage – or even beyond – military intervention. Economic sanctions have long been an important tool to exert pressure on nations that the State Department considers “rebellious”.

Tidal shift?

As the Obama era finance minister Jack Lew once warned, the centrality of the dollar in the global financial system depends on other nations’ willingness to abide by the rules in force. To maintain the monetary status quo, Lew argued that the United States should not abuse economic sanctions to maintain the impression that these measures are being used against foreign governments only for reasonable reasons and with sufficient justification.

The current government has paid little attention to these words. President Donald Trump has stepped up the application of sanctions and other financial restrictions against countries like Iran and China, which has brought the economic strength of the United States to a new level. As economist Jeffrey Sachs argued, this has led to the formation of a counter-coalition of disgruntled nations, led by China and Russia, which have accelerated their efforts to de-dollarize their economies. According to Sachs This geopolitical shift, combined with the declining share of the US economy in world gross domestic product, could mean the dollar’s decline as the world’s reserve currency.

Steve Kirsch, CEO of the M10 platform for digital currencies, agrees with Sachs’ assessment of the current international position of the dollar. Kirsch told Cointelegraph that “President Trump is arguably the biggest force keeping the rest of the world from the dollar and looking for an alternative“”

At the same time, most experts agree that the potential disappearance of the dollar’s reserve currency status is a distant perspective. Even in the midst of the current pandemic economic turmoil, accompanied by a massive US dollar liquidity inflow from the Federal Reserve, market confidence in the current reserve currency appears to be largely unchanged. Marc Fleury, co-founder and CEO of financial technology company Two Prime, told Cointelegraph:

“In times of turmoil, the United States still has a lot of responsibility and goodwill. The country’s recent disasters are irrelevant to this financial reality. The idea of ​​the greenback may be tired, but it is still powerful. The more we print dollars , the more you mobilize. “

Centralized digital alternatives

One of the main reasons for the continued dollar hegemony is the sluggishness of the gigantic international trading system. Since everyone involved has been dependent on the dollar for decades, you cannot simply choose an alternative, especially if it does not offer a significant increase in efficiency compared to old methods. However, the impending increase in developing countries with economies in transition could pose a viable threat to the dollar situation, precisely because they could offer a faster and more convenient means of exchange.

Some observers suggest that China may have the best chance of questioning the dominant position of the dollar if it successfully benefits from both its growing economic impact and the benefits of its potential digital currency infrastructure. Omri Ross, the chief blockchain scientist for the multi-asset trading platform eToro, commented Cointelegraph:

“While the Chinese economy is still lagging behind the western world in most statistics per person in the short term, an aggressive, expansive approach to innovation in physical and digital infrastructure combined with significant investment in emerging markets has positioned the upcoming” digital yuan ” as a natural competitor to the dollar. “

Ross added that this would be a successful monetary challenge for the United States. This would allow the Chinese government to exercise uncontrolled influence over multilateral trade agreements, circumvent sanctions, and even affect the arms balance. Two Prime’s Fleury believes that with the rise of China’s digital currency, two major centers of power could emerge in the global monetary system, with several other national currencies nearby: “At least we will see a bipolar global banking system with face values ​​in Chinese dollars and yuan. EUR / JPY can also be particularly important.“”

Another alternative view that the world’s central bankers are thinking about is a global public cryptocurrency that underlies a basket of national currencies. Mark Carney, former governor of the Bank of England, called it the “synthetic hegemonic currency”.

Related: A New Perspective for CBDCs: The Public-Private Solutions Needed for Acceptance

Although the rise in CBDCs appears inevitable at this point, there are clear limits to the amount and exchange rate that these centrally managed assets can trigger. Blockchain Dragon financial services leader John Deacon told Cointelegraph:

“His ability [de las CBDC] To change the global status quo of the monetary system, it is limited by the current increase in localization (due to trade wars and the corona virus) and the need to protect the local banking sector. This opens a niche for a non-CBDC digital currency (i.e., not involved in or influenced by a single country or bloc’s economic or trade policies) to act as a store of value and a means of exchange. “

Regardless of whether the currency of a single state is paper or digital, it remains committed to the national and international agenda of the national government, argued Ido Sadeh Man, founder of cryptocurrency company Saga Monetary Technologies, adding:

“We could see that a decentralized digital currency is becoming more important as a name for the reserves – that is quite possible. […] Imagine that the future global monetary system feels like a forked path today: either we continue to put technology on a faulty system, or; We develop and experience all the possibilities of technology to redesign and strengthen the global currency model. “

A shot of a decentralized reserve currency

In a scenario where the dollar remains the world’s currency hegemon or where even another local currency takes its place, the nation responsible for the global unit of account can continue to use its status. Decoupling the currency area from geopolitical power appears more practical if international trade finds a way to switch to a politically neutral currency. According to some analysts, the US-China confrontation could promote the emergence of a neutral solution::

“The geopolitical tensions between China and the United States resulting from the race for the dominance of a digital currency could become fertile ground for the emergence of an independent settlement class worldwide. As companies prefer a stable macroeconomic environment, the incentive to do business in handling a globally neutral currency is enormous. […] It is impossible to say whether the decentralized digital currency would be Bitcoin in this scenario. Bitcoin’s biggest challenges remain volatility and acceptance. “

James Wo, president and CEO of the venture capital company Digital Finance Group, relies on Ether (ETH) rather than Bitcoin, according to Cointelegraph:

“I don’t think Bitcoin can replace the USD because Fiat’s key functionality is to act as a payment instrument. In the short term, Bitcoin has no solid method to solve its scalability problems, so it cannot be used as a method. ” Payment. The definition of bitcoin is more of a commodity like gold. I think Ethereum (ETH) has the chance to become the world’s programmable currency. “

M10’s Kirsch does not believe Bitcoin is up to the challenge as he sees the future digital euro as the most likely contender for the throne: “Bitcoin is a cloud accounting system. The USD is legal tender. If there is an electronic euro issued by the ECB [Banco Central Europeo]This could be a challenge for the USD if it were easier to do 24/7 electronic transactions“”

Fleury told Cointelegraph that, in his opinion, Bitcoin “Almost no chance of achieving reserve currency statusTwo main structural reasons are volatility and the algorithmically limited supply. From a monetary policy perspective, a global reserve currency must be flexible. Another obstacle for Bitcoin is the concentration of wealth that promises to create “billionaires” in the shade “in the event that it becomes a reserve currency.

Other observers are more optimistic about the possibilities for decentralized digital currencies to take on the role of a medium for global exchange. Miles Paschini, founder and director of cryptocurrency investment platform B21, highlighted the potential of cryptocurrencies to offer a more user-friendly payment method that will be widely used:

“If a system provides easier access to funds, easier movement of funds, and better inflation control, a change in assumption is likely. This is a change in profit that can be done with great certainty. Real-time user experience and payments “Not all of the required attributes are in place at the moment, but they are improving, and in the future we will certainly see that the technology offers these aspects.”

It is also possible that the emergence of many alternatives to the dollar will lead to a multipolar agreement in which no single currency has a hegemonic status. Frank Schuil, a cryptocurrency investor and advisor, said: “Most people believe that ultimately a hybrid form is what we’ll end up working with: state currencies, decentralized cryptocurrencies, and corporate currenciesDespite this potential diversity, Schuil believes that Bitcoin as “people’s money” has the best chance of taking on the winning job.