The question of whether the US dollar will be dethroned by a cryptocurrency, a stablecoin, or some other digital asset or payments system ultimately misses the point. What really matters is the mix of possible alternatives that today's evolving financial landscape will offer to governments pursuing a geopolitical advantage.
LONDON – A combination of geopolitical tensions and aspirations for economic autonomy is motivating Russia, China, the European Union, and others to move faster to establish new currency and financial systems. These developments naturally raise questions about the US dollar’s central role in global trade and finance – questions that necessarily implicate the future of the existing international order.
The impact of geopolitics on currency markets is clear. Safe-haven currencies like the Japanese yen are showing significant gains, whereas the status of the Russian ruble remains uncertain. In emerging markets like Turkey, erratic policies and abrupt policy changes are sustaining considerable currency volatility. And, of course, America’s own internal economic challenges are major variables to watch. A failure to manage its high national debt and political strife could lead to a decline in global confidence in the greenback.
While developments in Asia, the Middle East, and Eastern Europe have been dominating the economic discourse and driving currency dynamics, there is nothing new about significant exchange-rate movements following major world events. What is new are digital assets, which are further complicating the picture. A particularly concerning trend is the move by countries and entities under the influence of the Communist Party of China (through Hong Kong) to evade the regulatory purview of the United States by adopting digital alternatives to the dollar.
The shift toward a crypto-based financial system, operating beyond traditional regulatory frameworks, obviously has the potential to erode dollar hegemony. To some, the evolution of Bitcoin exchange-traded funds and public listings of cryptocurrency companies may suggest that crypto will sit neatly within existing power structures, and they would be correct. The emergence of Bitcoin ETFs could reasonably be categorized as an attempt to “institutionalize” and control Bitcoin through these structures. But the battle for currency supremacy is a multilateral one – where these currencies break new ground is in their lack of allegiance to the dollar or US financial systems. US financial systems and the dollar can interact with digital currencies, but digital currencies do not require them to operate.
Bitcoin and other digital currencies that are not backed by any state are here to stay; and fiat-based digital assets like stablecoins or “state-backed” central bank digital currencies (CBDCs) also will offer new advantages in today’s fiercely competitive global economy.
A Messy Picture
Still, the question of whether the dollar will be dethroned by a digital asset, a stablecoin, or some other currency ultimately misses the point. What really matters is the mix of possible alternatives that the evolving financial landscape will offer to governments pursuing a geopolitical advantage. In this context, new techno-powered alternative currencies should be understood as pawns in an older battle for strategic dominance for which there is no end in sight. The likely outcome will be a difficult, and potentially destabilizing, transition toward a multipolar currency system inhabited by a complex mix of state- and non-state-backed alternatives.
But this will not happen overnight. Despite successful “experiments” like El Salvador (which gained millions in dollars by simply holding onto Bitcoin reserves), there is no basis to anticipate the imminent end of dollar hegemony. After all, the greenback’s status as the world’s safest reserve currency still aligns well with the needs of countries that boast large trade surpluses – not least China. The US-centered global financial system is what allows these countries to convert their net exports into safe assets. Without the dollar, non-American capitalists outside the US would not have been able to accrue and safely store such immense surplus value from their labor forces.
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Technological innovation cannot simply bypass longstanding financial norms or put an end to complex political disputes that have been playing out over the course of centuries. International-relations theory largely rejects the possibility of a harmonic global currency system being built without ulterior motives. According to the realist view, which regards states as rational interest maximizers, currency dominance is another means of ensuring one’s own security and material power. A robust national currency serves this objective for the issuing country.
But this isn’t the only way to look at the currency competition. While liberalism favors economic cooperation and assumes the rationality of national players, states will not hesitate to abandon established norms when threatened, or when seized by other motives. Consider Russia’s abrupt pivot to a zero-sum mindset in early 2022, when it invaded Ukraine and effectively invited sweeping international sanctions. At the end of the day, even the most idea-focused theorists must recognize that innovation and power can mean different things to different states.
The tension between political power and technological progress is also reflected in the intergovernmental organizations shaping the rollout of digital assets. While the United Nations has made strides in shaping crypto-asset policy through initiatives like the Financial Action Task Force’s 2019 Travel Rule, its power is inherently limited by international-relations norms, like the priority of maintaining diplomatic relations with all countries and following the guidance of the G7.
The numbers speak for themselves: as of March 2022, only 29 of 98 jurisdictions had implemented the Travel Rule. Other bodies, such as the International Organization for Standardization and the Bank for International Settlements, have also faced implementation difficulties, owing to cultural and economic-development differences among member states.
Without widespread buy-in, a policy’s impact will always be limited, no matter how well it is designed. So far, there has been little public outcry about major policy moves to address the rise of digital assets. But that can always change, because norms of restraint can quickly fall by the wayside when something (like a new cryptocurrency) threatens a state’s power.
Cui Bono?
A digital asset’s potential for wider adoption and use is most enticing not to the countries that already dominate international organizations, but to those that stand to benefit the most from a currency disruption. Academics, policymakers, and innovators can all agree that digital assets hold the promise of empowering emerging economies and encouraging healthy, if not groundbreaking, competition.
The greater the progress toward a multipolar global (digital) currency system, the more that US currency dominance will wane in relative terms. Though the US will likely remain a financial powerhouse, its domestic instability (from frequent threats of government shutdowns to deepening polarization over foreign policy) has weakened the world’s confidence in its leadership.
Evidence of this changing attitude is not confined to traditional fiat-currency markets. The skepticism toward stablecoins like Tether’s USDT and Circle’s USDC also reflects mixed feelings about America’s long-term reliability. While pegging these assets to a stable currency like the dollar makes sense, it also raises concerns among those who worry about US financial dominance creeping into the supposedly international digital domain. Moreover, the uncertain future of US crypto regulation does little to inspire confidence in investors, buyers, or traders.
CBDCs are another popular way for countries to get in on the digital-asset game; and unlike stablecoins, they need not rely on a foreign-currency peg. With all the original BRICS countries (Brazil, Russia, India, China, and South Africa) having already launched CBDC programs, the question is not whether more countries will go down this road, but when and why, and how their global standing might change as a result.
We already know why some countries would move in this direction. At the BRICS summit last August, Russian President Vladimir Putin boasted that, “The objective, irreversible process of de-dollarization of our economic ties is gaining momentum.” His motivations are obvious. Western sanctions, enforced through dollar hegemony, have severely constrained Russia’s access to markets, capital, and technology.
But Putin is not alone in rooting for alternatives to the dollar. For his part, Brazilian President Luiz Inácio Lula da Silva supports the creation of a common BRICS currency for intra-bloc trading and investment. While most experts doubt that this proposal would be a game-changer in the broad scheme of things, it suggests growing interest in establishing a more multipolar international currency system.
Lending additional momentum to these trends are developments in the burgeoning digital economy. New tech behemoths like TikTok are masterfully extracting revenue from the US market and funneling wealth back to China. Unlike firms in the traditional goods and services trade, digital platforms operate on a new model that frees them from much reliance on dollars to sustain their infrastructure or offer their services (which they produce at near-zero marginal cost). They can operate with any currency and do not require cash. This means that even when platforms like TikTok take in funds in dollars, they can move out of that position with ease and exchange into any number of digital formats that best suit their needs, whether that be a fiat currency or a cryptocurrency, in a bank account or wallet in their main country of operation. This is the case for any new digital company, and their level of crypto-acceptance determines how well they can separate from dollar dominance.
This paradigm shift implies that as the growth of the digital realm continues to outpace that of the tangible economy, China’s reliance (as well as that of other countries) on US regulatory power over physical trade will gradually diminish. It will face increased scrutiny and requirements to engage with US consumers, as evidenced by Congress’s recent TikTok bill. But the ability to sell to US consumers may not be tied to accepting dollars for much longer. A platform like TikTok that adheres to all US regulations but accepts payments from their US customers in cryptocurrencies from their digital wallets is a very different creature.
In the new digital economy, rules are subtly being rewritten to reduce others’ reliance on the US market for exports and savings. These early signs herald a bold new chapter in global economics, where digital prowess will reshape traditional dependencies. Many countries are clearly ready for a new geopolitical order, and digital assets may prove to be the catalyst.
The Race Is On
Even as we recognize the potential of digital assets to benefit the public, we must carefully evaluate specific uses and platforms. With Web3 and other crypto applications already making headway in their respective sectors, we must remember that these projects do not exist in a vacuum. Progress toward widespread adoption of digital assets must continuously be analyzed for its potential repercussions in the global currency domain.
For now, one of the frontrunners in the digital-asset race is China. Its digital renminbi, introduced as a pilot program in 2020, could provide the basis for a non-US-controlled international payments rail. Russia has already increased its own reliance on the Chinese currency to skirt sanctions, and it is easy to imagine that other countries could follow suit in the future. Welcome to the new age of currency competition.
As for which currency will become dominant in the coming years, it depends on the appetite of challengers to compete with the dollar. The renminbi would benefit considerably from the abandonment of capital controls. A BRICS currency could fare better if it adopts some elements of scarcity and inflation controls (perhaps through reliance on blockchain, as some recent reports indicate could happen). A singularly powerful digital currency would require extensive on- and off-ramp access to fiat currencies as well as widespread acceptance as a form of value. All of this is within the realm of possibility. What remains to be seen is which will reign supreme.
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LONDON – A combination of geopolitical tensions and aspirations for economic autonomy is motivating Russia, China, the European Union, and others to move faster to establish new currency and financial systems. These developments naturally raise questions about the US dollar’s central role in global trade and finance – questions that necessarily implicate the future of the existing international order.
The impact of geopolitics on currency markets is clear. Safe-haven currencies like the Japanese yen are showing significant gains, whereas the status of the Russian ruble remains uncertain. In emerging markets like Turkey, erratic policies and abrupt policy changes are sustaining considerable currency volatility. And, of course, America’s own internal economic challenges are major variables to watch. A failure to manage its high national debt and political strife could lead to a decline in global confidence in the greenback.
While developments in Asia, the Middle East, and Eastern Europe have been dominating the economic discourse and driving currency dynamics, there is nothing new about significant exchange-rate movements following major world events. What is new are digital assets, which are further complicating the picture. A particularly concerning trend is the move by countries and entities under the influence of the Communist Party of China (through Hong Kong) to evade the regulatory purview of the United States by adopting digital alternatives to the dollar.
The shift toward a crypto-based financial system, operating beyond traditional regulatory frameworks, obviously has the potential to erode dollar hegemony. To some, the evolution of Bitcoin exchange-traded funds and public listings of cryptocurrency companies may suggest that crypto will sit neatly within existing power structures, and they would be correct. The emergence of Bitcoin ETFs could reasonably be categorized as an attempt to “institutionalize” and control Bitcoin through these structures. But the battle for currency supremacy is a multilateral one – where these currencies break new ground is in their lack of allegiance to the dollar or US financial systems. US financial systems and the dollar can interact with digital currencies, but digital currencies do not require them to operate.
Bitcoin and other digital currencies that are not backed by any state are here to stay; and fiat-based digital assets like stablecoins or “state-backed” central bank digital currencies (CBDCs) also will offer new advantages in today’s fiercely competitive global economy.
A Messy Picture
Still, the question of whether the dollar will be dethroned by a digital asset, a stablecoin, or some other currency ultimately misses the point. What really matters is the mix of possible alternatives that the evolving financial landscape will offer to governments pursuing a geopolitical advantage. In this context, new techno-powered alternative currencies should be understood as pawns in an older battle for strategic dominance for which there is no end in sight. The likely outcome will be a difficult, and potentially destabilizing, transition toward a multipolar currency system inhabited by a complex mix of state- and non-state-backed alternatives.
But this will not happen overnight. Despite successful “experiments” like El Salvador (which gained millions in dollars by simply holding onto Bitcoin reserves), there is no basis to anticipate the imminent end of dollar hegemony. After all, the greenback’s status as the world’s safest reserve currency still aligns well with the needs of countries that boast large trade surpluses – not least China. The US-centered global financial system is what allows these countries to convert their net exports into safe assets. Without the dollar, non-American capitalists outside the US would not have been able to accrue and safely store such immense surplus value from their labor forces.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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Technological innovation cannot simply bypass longstanding financial norms or put an end to complex political disputes that have been playing out over the course of centuries. International-relations theory largely rejects the possibility of a harmonic global currency system being built without ulterior motives. According to the realist view, which regards states as rational interest maximizers, currency dominance is another means of ensuring one’s own security and material power. A robust national currency serves this objective for the issuing country.
But this isn’t the only way to look at the currency competition. While liberalism favors economic cooperation and assumes the rationality of national players, states will not hesitate to abandon established norms when threatened, or when seized by other motives. Consider Russia’s abrupt pivot to a zero-sum mindset in early 2022, when it invaded Ukraine and effectively invited sweeping international sanctions. At the end of the day, even the most idea-focused theorists must recognize that innovation and power can mean different things to different states.
The tension between political power and technological progress is also reflected in the intergovernmental organizations shaping the rollout of digital assets. While the United Nations has made strides in shaping crypto-asset policy through initiatives like the Financial Action Task Force’s 2019 Travel Rule, its power is inherently limited by international-relations norms, like the priority of maintaining diplomatic relations with all countries and following the guidance of the G7.
The numbers speak for themselves: as of March 2022, only 29 of 98 jurisdictions had implemented the Travel Rule. Other bodies, such as the International Organization for Standardization and the Bank for International Settlements, have also faced implementation difficulties, owing to cultural and economic-development differences among member states.
Without widespread buy-in, a policy’s impact will always be limited, no matter how well it is designed. So far, there has been little public outcry about major policy moves to address the rise of digital assets. But that can always change, because norms of restraint can quickly fall by the wayside when something (like a new cryptocurrency) threatens a state’s power.
Cui Bono?
A digital asset’s potential for wider adoption and use is most enticing not to the countries that already dominate international organizations, but to those that stand to benefit the most from a currency disruption. Academics, policymakers, and innovators can all agree that digital assets hold the promise of empowering emerging economies and encouraging healthy, if not groundbreaking, competition.
The greater the progress toward a multipolar global (digital) currency system, the more that US currency dominance will wane in relative terms. Though the US will likely remain a financial powerhouse, its domestic instability (from frequent threats of government shutdowns to deepening polarization over foreign policy) has weakened the world’s confidence in its leadership.
Evidence of this changing attitude is not confined to traditional fiat-currency markets. The skepticism toward stablecoins like Tether’s USDT and Circle’s USDC also reflects mixed feelings about America’s long-term reliability. While pegging these assets to a stable currency like the dollar makes sense, it also raises concerns among those who worry about US financial dominance creeping into the supposedly international digital domain. Moreover, the uncertain future of US crypto regulation does little to inspire confidence in investors, buyers, or traders.
CBDCs are another popular way for countries to get in on the digital-asset game; and unlike stablecoins, they need not rely on a foreign-currency peg. With all the original BRICS countries (Brazil, Russia, India, China, and South Africa) having already launched CBDC programs, the question is not whether more countries will go down this road, but when and why, and how their global standing might change as a result.
We already know why some countries would move in this direction. At the BRICS summit last August, Russian President Vladimir Putin boasted that, “The objective, irreversible process of de-dollarization of our economic ties is gaining momentum.” His motivations are obvious. Western sanctions, enforced through dollar hegemony, have severely constrained Russia’s access to markets, capital, and technology.
But Putin is not alone in rooting for alternatives to the dollar. For his part, Brazilian President Luiz Inácio Lula da Silva supports the creation of a common BRICS currency for intra-bloc trading and investment. While most experts doubt that this proposal would be a game-changer in the broad scheme of things, it suggests growing interest in establishing a more multipolar international currency system.
Lending additional momentum to these trends are developments in the burgeoning digital economy. New tech behemoths like TikTok are masterfully extracting revenue from the US market and funneling wealth back to China. Unlike firms in the traditional goods and services trade, digital platforms operate on a new model that frees them from much reliance on dollars to sustain their infrastructure or offer their services (which they produce at near-zero marginal cost). They can operate with any currency and do not require cash. This means that even when platforms like TikTok take in funds in dollars, they can move out of that position with ease and exchange into any number of digital formats that best suit their needs, whether that be a fiat currency or a cryptocurrency, in a bank account or wallet in their main country of operation. This is the case for any new digital company, and their level of crypto-acceptance determines how well they can separate from dollar dominance.
This paradigm shift implies that as the growth of the digital realm continues to outpace that of the tangible economy, China’s reliance (as well as that of other countries) on US regulatory power over physical trade will gradually diminish. It will face increased scrutiny and requirements to engage with US consumers, as evidenced by Congress’s recent TikTok bill. But the ability to sell to US consumers may not be tied to accepting dollars for much longer. A platform like TikTok that adheres to all US regulations but accepts payments from their US customers in cryptocurrencies from their digital wallets is a very different creature.
In the new digital economy, rules are subtly being rewritten to reduce others’ reliance on the US market for exports and savings. These early signs herald a bold new chapter in global economics, where digital prowess will reshape traditional dependencies. Many countries are clearly ready for a new geopolitical order, and digital assets may prove to be the catalyst.
The Race Is On
Even as we recognize the potential of digital assets to benefit the public, we must carefully evaluate specific uses and platforms. With Web3 and other crypto applications already making headway in their respective sectors, we must remember that these projects do not exist in a vacuum. Progress toward widespread adoption of digital assets must continuously be analyzed for its potential repercussions in the global currency domain.
For now, one of the frontrunners in the digital-asset race is China. Its digital renminbi, introduced as a pilot program in 2020, could provide the basis for a non-US-controlled international payments rail. Russia has already increased its own reliance on the Chinese currency to skirt sanctions, and it is easy to imagine that other countries could follow suit in the future. Welcome to the new age of currency competition.
As for which currency will become dominant in the coming years, it depends on the appetite of challengers to compete with the dollar. The renminbi would benefit considerably from the abandonment of capital controls. A BRICS currency could fare better if it adopts some elements of scarcity and inflation controls (perhaps through reliance on blockchain, as some recent reports indicate could happen). A singularly powerful digital currency would require extensive on- and off-ramp access to fiat currencies as well as widespread acceptance as a form of value. All of this is within the realm of possibility. What remains to be seen is which will reign supreme.