Bitcoin breaks new high, will the US dollar be driven out?

Translation: Com|DaLing Think Tank

Original link: https://cointelegraph.com/news/ousting-the-greenback-usd-still-king-as-btc-and-cbdcs-mount-challeng

The emergence of digital assets will threaten the global dominance of the US dollar, but it is not easy to overthrow the current global reserve currency, the US dollar.

The global monetary system has been centered on the dollar since the Bretton Woods Agreement in 1944, after the end of World War II, formally established the unchallenged dominance of the U.S. dollar. The U.S.’s control of the world’s reserve currency has also increased the country’s already enormous geopolitical influence and its ability to run large deficits at low cost.

Today, more and more experts believe that the hegemony of the US dollar may be declining. The United States's declining share of world trade, the expansion of China's monetary power, and the expected digitization of national currencies are likely to erode the foundations of the existing financial order. So, what role can future central bank digital currencies and crypto assets such as Bitcoin play in shaping new international financial circulation intermediaries?

America's Exorbitant Privilege

The most common term for the United States’ outsized influence in international trade, “monetary hegemony,” first used in economist Michael Hudson’s 1972 book Super Imperialism. Although the book was published nearly half a century ago, many of the ideas it articulated still hold true today.

As of this year, nearly 60% of foreign exchange reserves are still denominated in U.S. dollars. In addition to its 88% share in global foreign exchange transactions, about 40% of world trade is denominated and settled in U.S. dollars.

The dollar, as the world's unit of account, has a series of privileges that put the United States in a so-called privileged position. First, because it pays for imported goods with its own currency, its monetary hegemony is not subject to balance of payments constraints. This means that it does not face the risk of losing the ability to pay for basic imports or finance current deficits.

As the world's largest debtor nation, the United States has taken full advantage of the dollar's position. Since all parties involved in international trade - governments, companies and banks - always need dollar liquidity, the market's capacity for new dollar-denominated debt is almost unlimited. For decades, the United States has been spending more than its wealth can afford, thanks to the simplification of cheap international credit.

Is the dollar's status as the world's reserve currency declining?

As Obama-era Treasury Secretary Jack Lew once warned, the dollar’s ​​centrality to the global financial system depends on other countries’ willingness to play by the existing rules.

President Donald Trump has increased sanctions and other financial restrictions on countries like Iran. As economist Jeffrey Sachs has argued, this has led to an acceleration of the de-dollarization of economies in unhappy countries. Sachs believes this geopolitical shift, combined with the shrinking share of the U.S. economy in global GDP, could signal a decline in the dollar’s ​​status as the world’s reserve currency.

Steve Kirsch, CEO of M10, agrees with Sachs’ assessment of the dollar’s ​​current international status. “President Trump is arguably the biggest force driving the rest of the world away from the dollar and toward alternatives,” Kirsch told Cointelegraph.

Centralized digital alternatives

One of the main reasons for the persistence of the dollar's hegemony is the inertia inherent in the vast international trading system. Since all parties involved in this scheme have relied on the dollar for decades, one cannot simply decide to choose another way, especially if the dollar does not bring significant efficiency gains compared to the old way. However, the rise of CBDCs could pose a credible threat to the dollar's position, as they could provide a faster and more convenient medium of exchange.

Some observers have pointed out that China is perhaps best positioned to challenge the dollar’s ​​dominance if it successfully leverages its expanding economic influence and the availability of its future digital currency infrastructure. Omri Ross, chief blockchain scientist at multi-asset trading platform eToro, commented to Cointelegraph:

“ While in the short term the Chinese economy still lags behind the Western world in most per capita indicators, its aggressive expansionary approach to innovation in both physical and digital infrastructure, coupled with significant investments in emerging markets, will make the upcoming ‘digital yuan’ a natural competitor to the U.S. dollar. ”

Two Prime’s Fleury believes that with the rise of Chinese digital assets, the global monetary system may see two major centers of power, with a number of other national currencies following closely behind: “At a minimum, we will see a bipolar world banking system, denominated in dollars and yuan. The euro and yen are also important.”

Another idea being considered by central bankers around the world is to create a global public crypto asset based on a basket of national currencies, a design that former Bank of England Governor Mark Carney has called a “synthetic hegemonic currency.”

While the rise of CBDCs seems inevitable at this point, there are clear limits to the amount and kind of change these centrally controlled assets can bring. John Deacon, head of financial services at blockchain firm Dragon, told Cointelegraph:

“ The ability of the trade war and coronavirus to disrupt the status quo of the global monetary system will be limited by the current increased localization and the need to protect domestic banking sectors. This carves out a niche for non-CBDC digital currencies (i.e. currencies that are not biased towards or influenced by the economic or trade policies of one country or group) as a store of value and medium of exchange. ”

Ido Sadeh Man, founder of crypto asset firm Saga Monetary Technologies, believes that regardless of whether a country’s currency is paper or digital, it is still subject to the government’s national and international agenda, adding:

“ Today, imagining the future global monetary system feels like a fork in the road: either we continue to add technology to a flawed system, or we unlock and experience the full power of technology to redesign and strengthen the global monetary model. ”

Challenges facing Bitcoin

As long as the dollar remains the world’s dominant currency, and even as another national currency threatens to eventually replace it, the country that controls the world’s unit of account can still use it to improve its status.

If international trade finds a way to move toward politically neutral currencies, then decoupling monetary dominance from geopolitical power seems more feasible. Ross of eToro observed:

“ Given that most businesses prefer a stable macroeconomic environment, the incentive to settle transactions in a globally neutral currency will be huge. In this context, the biggest challenges facing Bitcoin remain volatility and adoption. ”

James Wo, chairman and CEO of venture capital firm Digital Finance Group, told Cointelegraph that he is investing his money in Ether instead of Bitcoin:

“ I don’t think Bitcoin can replace the US dollar, because one of the important functions of the US dollar is to serve as a payment tool. In the short term, Bitcoin has not yet found a reliable way to solve its scalability problem, so it cannot be used as a payment method. The definition of Bitcoin is closer to a commodity, like gold. I think Ethereum has the opportunity to become a global programmable circulating asset. ”

M10’s Kirsch doesn’t think Bitcoin is up to the challenge, as he sees a future digital euro as the most likely contender for the throne: “Bitcoin is a cloud computing system. The dollar is a fiat currency. If the European Central Bank (ECB) issued an electronic version of the euro, and if electronic transactions were easier to do 24x7, then that could be a challenge to the dollar.”

Fleuri told Cointelegraph that in his opinion, Bitcoin has “almost zero chance of reaching reserve currency status.” The two main structural reasons for this are its volatility and algorithmically limited supply. From a monetary policy perspective, a global reserve currency must be flexible.

It’s also possible that the emergence of many alternatives to the dollar will lead to a multipolar arrangement where no single currency enjoys hegemony. Crypto consultant and investor Frank Schuil noted: “Most people think the end result will be a hybrid: state-based currencies, decentralized crypto assets, and corporate currencies.” Even with this potential diversity, Schuil believes Bitcoin is still the most likely to win.

This article is a translation. Its content is intended for information transmission and does not constitute any investment advice.

Some pictures are from the original text.