Why Cryptocurrencies Could Push The Dollar From World Reserve Currency Status
This year, blockchain technology has skyrocketed in popularity — and for good reason. Blockchains have the potential to decentralize how trust is guaranteed in anything that can be stored digitally, which includes money, data, identity and ownership records.
It is hard to exaggerate the potential disruption of legacy institutions and business models. In late September, the head of IMF, Christine Lagarde, cautioned that cryptocurrencies can displace central banks, conventional banking and national monies in the long term.
What has gotten less attention, however, is how blockchain will impact international politics in general and economic statecraft in particular. A key foundation of the predominance of the West, and particularly the United States, is the reliance on economic power. It is codified in the Bretton-Woods institutions and the role of the U.S. dollar as the world’s reserve currency. Since all financial actors need to function on the U.S. market, the U.S. treasury’s domestic powers are in effect international. If they designate an entity a money-laundering concern or suspect of terrorist activity, the possibility to do business or transfers would vanish.
Blockchain-based cryptocurrencies, however, threaten to disrupt this foundation by decentralizing the operation of the financial system outside sovereign states’ control. This ties well into the goals of revisionist states, who long have sought to de-dollarize the world economy. The most noteworthy actor in this regard is Russia, who announced on Oct. 15 that it will issue a blockchain-based CryptoRuble.
Russia has been at the forefront of encouraging a national cryptocurrency as a way to avoid Western sanctions and economic influence. To this goal, Putin has met with Vitalik Buterin, founder of the second largest cryptocurrency Ethereum, and discussed its possible implementation in Russia. The more global cryptocurrencies are used, the less influence can be generated from the role of the US dollar.
A key vulnerability in the Russian economy is the access to SWIFT, the standardised network for interbank transactions. After Russia’s invasion of Ukraine, there were many calls to prohibit Russia’s access to SWIFT. Among transfers between Russian banks, only 5-10% went outside the SWIFT system. It has sometimes been called the ‘nuclear option’ of economic warfare to block a state from its access to SWIFT and Prime Minister Medvedev have said that there would be ‘no limits’ to the Russian response if they were de-swifted. Russia is indeed right to be worried; when the EU imposed sanctions Iran’s access to SWIFT, the Iranian’s capability to move money out of Iran was disrupted. Hyperinflation ensued and the rial lost 50% of its value against the dollar and have not rebounded since.
When trust is guaranteed by a protocol instead of financial institutions, mostly based in the West, the capability of the West to leverage economic power is reduced, which has been a key component of its grand strategy since the Second World War. Decentralized protocols are impossible for one state to sanction. A successful implementation of a national cryptocurrencies, as pioneered as well in Estonia and Tunisia, or larger implementation of global ones, will mitigate the impact of Western sanctions in general and the option of sanctioning of SWIFT in particular.
Using public blockchains, transactions can be made quicker, cheaper and without the involvement of any third parties. Today, an international transfer requires several days and multiple institutions: banks, clearinghouses and SWIFT. Transactions with cryptocurrencies, such as Dash and Litecoin, cost between 1-2 cents and take seconds or minutes.
The use of Bitcoin already gives North Korea opportunities to circumvent Western sanctions. According to Recorded Future, a threat intelligence company, North Korea commenced a large-scale Bitcoin-mining operation on May 17. Similarly, one of Putin’s internet advisors, Dmitry Marinichev, launched a $100 million operation to mine Bitcoin. All these cases offer opportunities for states to diversify value outside the dollar system, as opposed to commodities that are generally traded in dollars.
In Venezuela, mining Bitcoin has offered an opportunity for survival. In the midst of a hyperinflation in the bolivar projected to reach 1,600% year to year, many have started mining Bitcoin in order to pay for basic necessities. Since electricity is heavily subsidised, it is one of few commodities that the inhabitants have access to and can convert to Bitcoin with the rest of the economy falling.
The core impact of blockchain technologies is a powerful decentralization. For centralized incumbents — the U.S. dollar as the world’s reserve currency, the financial system, predominantly governed by Western financial institutions — their leverage is poised to decrease. For revisionist states, cryptocurrencies can be an attractive alternative to speed up this process.
Sign up for the Moguldom newsletter — business news you need to know about economic empowerment for the digital age, delivered to your inbox.