A decentralizing world needs a decentralized currency | by Patrick Tan | April 2022
Globalization may have ended the minute the first Russian soldier entered Ukraine, and with it the idea of a centralized global currency.
Like Russian tanks entered Ukraine for the “denazification” of the country, the veneer of global condemnation was marked by its lack of a genuine and unified response.
While Western nations rallied around Ukraine and condemned Russia, others took a much more restrained approach, from South Africa whose President Cyril Ramaphosa sought a “balanced” stance on war, deafening silence from China on the issue.
Brazilian President Jair Bolsonaro said:
“We will not take sides. We will continue to be neutral and help with whatever is possible.
While Mexican President Andrés Manuel López Obrador has refused to join his country in Western sanctions against Russia, saying,
“We are not going to take any kind of economic retaliation because we want to have good relations with all the governments of the world.”
For anyone who primarily consumes Western media, it may seem like the world is united in condemning the Russian invasion of Ukraine, but dig a little deeper, read between the lines, and it becomes alarmingly clear that there is no such global coalition.
And it could have significant implications not only for the post-war rules-based global order led by the United States, but also have a dramatic impact on the future of international finance, including the decision of states States and their allies to freeze Russia’s foreign exchange reserves.
Dollar for dominance
The dollar is so dominant that even on the eve of Russia’s invasion of Ukraine, no less than 25% of the country’s foreign holdings were denominated in dollars, holdings that Moscow has since discovered it can no longer to access.
Admittedly, this is not the first time that Washington has militarized the dollar.
Shortly after US troops left Afghanistan, Washington moved to freeze the conquering Taliban’s access to the country’s foreign exchange reserves, which were almost all in dollars and held in US financial institutions.
The Biden administration’s freezing of Afghan foreign assets has plunged the country into economic ruin and today up to 95% of the Afghan population does not have enough to eat on a daily basis.
While imposing sanctions on Afghanistan, the world’s 113th (or smallest) economy, is unlikely to have major ramifications for the global economy, sanctioning a country the size of Russia, which is the world’s 11th largest economy, has serious repercussions that the world comes to terms with.
The power of US sanctions derives from the dominance of the US dollar, which is the currency most widely used in commerce, financial transactions and central bank reserves.
Yet by explicitly weaponizing the dollar against a country the size of Russia, the United States and its allies risk provoking a backlash that could ultimately undermine the greenback and decentralize the global financial system into blocs that would increase inefficiencies, would increase the threat of currency wars and leave everyone worse off.
History is full of how wars have upended previous monetary hegemonies, from the Romans to the British.
A dollar for my empire
In a speech earlier this month, the former executive vice president of the Bank of China, Zhang Yanling, said Western sanctions “would cause the United States to lose credibility and undermine long-term dollar hegemony.” , suggesting that China could help the world “get rid of dollar hegemony as soon as possible.”
And Larry Fink, the CEO of the world’s largest asset manager, BlackRock, argued in his annual letter to shareholders that “the Russian invasion of Ukraine ended the globalization that we have known for last three decades”, which could see the greatest use of digital currencies.
But such a view also ignores the inertia of cross-border finance – once a currency is widely used, this network effect and the infrastructure that supports it become difficult to dismantle.
Even after the last paved road no longer led to Rome, Roman coinage was still used in parts of the old empire.
And despite the hellish sanctions Western allies have imposed on Russia, Russians themselves have found ways around those sanctions, with ordinary Russians returning to cryptocurrencies to help transport their wealth out of the country as the ruble was collapsing.
This initial Russian demand for cryptocurrencies has since waned, and the ruble has largely recovered, thanks to the draconian capital controls and meteoric interest rate hikes that Moscow unveiled in response to the sanctions.
Nevertheless, there are tentative signs that Russia has already found ways to circumvent the US dollar-based financial system, one area of which is trade.
India, for example, which is heavily dependent on Russian arms and keen to maintain its independent foreign policy, flirts with the idea of providing a payment backdoor to Russia.
And Hungary has agreed to pay for Russian gas in rubles.
These “currency corridors” are likely to expand as more countries attempt to find viable alternatives to the dollar and as the global financial system becomes fragmented.
China has spent years developing its own yuan-denominated cross-border interbank payments system intended to rival the Western-dominated SWIFT system and now has more than 1,200 member institutions in 100 countries.
Both CIPS and SWIFT are messaging networks through which international payments are initiated.
But China’s CIPS is tiny compared to SWIFT and that’s partly because the yuan is still not a fully convertible currency, and it’s unlikely to be in the near future due to Beijing’s fear of capital flight.
Yet both CIPS and SWIFT have a decentralized analogue in cryptocurrencies.
Without ever needing a financial intermediary, counterparties can transfer massive sums, include and attach all necessary messages, and rely on smart contracts for cross-border transactions.
But while cryptocurrencies can potentially provide an alternative in the future, for now there are few real challengers to the dollar.
With its accommodative monetary policy, open markets, deep and liquid capital markets and easily convertible currency, there is no real substitute for the dollar.
The US economy is also the strongest and most innovative in the world, with independent institutions and strong checks and balances, attributes no other country can claim to come close to, let alone unequivocally compete with.
This is where the argument for decentralized currencies comes in, not just Bitcoin alone.
While Bitcoin could potentially serve as a store of value, with fiat currencies referring to the benchmark cryptocurrency, other cryptocurrencies like Ether or Solana could be used in smart contracts to facilitate both decentralized finance and financing cross-border trade.
Today, the selection of a contracting currency has become more politicized than ever, and the selection of a contracting currency risks drawing trading counterparties into an ideological minefield.
Rather than drawing political lines in business transactions, contracting parties could simply decide to use a variety of cryptocurrencies to achieve their goal, without offending or obliging any sovereign state.
Such a concept may not be as far-fetched as it seems.
Although El Salvador was the first country in the world to declare Bitcoin legal tender, Mexico is considering a similar move and if the move generates enough traction, it has the potential to create the same kind of network effects. than the dollar.
Just as Bretton Woods, the dollar-based, gold-backed global monetary system made the greenback the center of economic life, a cryptocurrency-led “New Bretton Woods” could potentially arise from the invasion. Russian from Ukraine.
In the previous Bretton Woods, the dollar was backed in gold, and other currencies were referenced to the dollar, to avoid the ruinous currency wars that helped start World War II.
When the United States abandoned the gold standard in 1971, effectively ending Bretton Woods, currency wars were largely avoided as the world was content to use the dollar as its benchmark currency, even though it was no longer backed by gold.
Now that the dollar has been weaponized, more and more countries are going to wonder if they should subsidize American profligacy and it’s entirely possible that the world will return to some form of “guaranteed money”, even possibly backed by Bitcoin.
Since the creation of bitcoin is decentralized and programmatically limited to 21 million, it is not susceptible to the kind of debasement that fiat currencies like the dollar are, nor can it be weaponized from the same way.
Unlike the dollar, no authority can “confiscate” bitcoin from another, as Washington was able to invalidate the dollar-denominated foreign exchange reserves of its enemies.
While Russians today may no longer be chasing cryptocurrencies as feverishly as they were when the sanctions began, the full economic effect of these Western sanctions has yet to be felt.
Only in time will Russia’s financial blockade be fully felt by the country and its people, and the United States and its allies stand ready to apply those same stinging sanctions against those who aid and abet Moscow in avoid and which, in the long term, will encourage an active search for alternatives.
Global head of short-term interest rate strategy at Credit Suisse Group, Zoltan Pozsar, agrees with BlackRock’s Fink, speaking to Bloomberg’s Odd Lotsnotes Pozsar,
“Larry Fink is right, or rather is probably more knowledgeable than all of us on this forum. I agree that globalization, as we know it, is probably over.
If globalization is over, then the age of decentralization will likely come and a decentralized world will need decentralized currency.