Bitcoin Can Erode America’s Hegemony on the World Reserve Currency
As bitcoin (BTC) surges in value, positive investment theses for digital assets are resurfacing. Those who have been involved in the space long enough understand the power bitcoin as a universal currency. Now, corporations and governments are finally entering the space to either utilize or regulate cryptocurrencies as they are realizing that the pioneer cryptocurrency can strip dominance from any government.
How America Pushed Their way to the top
American dominance over the rest of the world is old news. Since the end of World War II, the United States has taken up the role as the de facto global leader, resulting in an abundance of resources and opportunities within the country.
After World War II, the 44 most powerful countries met at the Bretton Woods conference to discuss the future of international relations and global economics. The desired outcome of the conference was to figure out how countries would pay each other for exports and imports. Representing Britain was John Maynard Keynes, a name that needs little introduction.
Keynes suggested the introduction of a global currency called “Bancor” that could be used for international settlements. The USA under Franklin Roosevelt had different plans and were eager to assert their supremacy, coercing Britain and the other countries to concede to using USD as the global settlement currency. Britain being aware of their weak position in the aftermath of the war, caved to American demands as did the rest of the nations present at the conference.
Almost 75 years later, this has proven to be the single most illustrious decision for American growth and expansion. Countries around the world settle their debts in USD, with others even pegging their currency to the USD in an attempt to control inflation. Taking a look at the macro scenario today, the world is merely a few steps away from having to ask the USA’s permission to execute even sovereign decisions.
Control the Money, Control the World
Every major country today faces a plethora of economic woes simply because of the way the USA has forced its will on the global economy.
China is being forced into a trade war with their largest export market, India has to make arrangements to procure oil from other countries because of sanctions on Iran, and their historic allies in the EU are also suffering as a result.
President Trump has taken a particular disdain for China, angered by the imbalance of the current accounts between the two countries. China produces far more than it requires and exports it to America for consumption, where Chinese goods have a price competitive advantage due to the cheap inputs of production and China’s manipulation of the yuan.
If the USA continues on this trajectory, asking permission will be inevitable, thus forcing their will on countries in sovereign matters will become a daily event.
Take the case of India. The USA wants them to find a new source for oil because of the economic sanctions they imposed on Iran. India purchases some oil from Venezuela who offered to sell it at a discount if India used Venezuela’s national cryptocurrency, but transporting bulk amounts of oil from South America to South East Asia will cause India’s effective price per barrel of oil to skyrocket due to freight costs.
Cryptocurrency Can Help Countries Take Charge
Bitcoin started off as a form of electronic P2P cash. Over the course of the last few years, the vision and mission have grown more ambitious and now aims to become a global settlement layer.
When Japan bought goods from Russia, they paid off their debt by giving Russia the required amount of rubles. But if Japan has no rubles in its currency reserves, the only option is for them to use the USD. To resolve this, enter cryptocurrency.
Bitcoin has the power to defy any and all authority, even between two sovereign, independent nations. In the same transaction above, if Japan decided they didn’t want to use USD anymore, they could transfer value via bitcoin to Russia, and Russia could exchange the bitcoin for the equivalent amount of rubles. This helps countries not only reduce the need for USD as a global currency but it also ends America’s unwavering dominance and crippling sanctions.
The main problem with bitcoin as a settlement layer today, however, is the volatility. The Antonopolous paradox emerges once again, where bitcoin needs adoption for volatility to cease, and volatility needs to cease to garner adoption. To resolve this, stablecoins have the ability to allow the user and recipient to transact using the same base value due to low volatility.
Unfortunately, most functional stablecoins are centralized, which would make countries unwilling to use a currency that can potentially be manipulated by a single entity. In fact, any centralized coin would once again pose the same problems that using the USD does.
In short, if the big picture is equal footing for countries and the ability to control their own economies and choose their own trade partners, decentralization is the only solution.
Change Has Already Begun
The DXY, an index that measures the value of the dollar to a basket of other currencies, has been falling for the last week, where bitcoin has surged by double-digit percentages.
This is no coincidence as historical price movements show an inverse correlation between DXY and bitcoin. ING’s head of strategy, Chris Turner, believes bitcoin could spell doom for the dollar’s dominance. Ever since positive sentiment returned to bitcoin, the DXY has been choppy, trading in a range until the recent fall.
The cost of hedging against USD has also decreased – a significant indicator that dollar strength won’t be coming back too soon. To add to their troubles, personal consumption expenditure data will be released in July. Another poor reading could cause investors and the Fed to worry.
Everyone is waiting for the revolution to begin, but it rarely starts with a bang.
It starts slow and steady, but soon governments are forced to not just regulate it, but to build a competing system in a distributed or decentralized manner. Thus, the only way to kill decentralized currencies now is for every country to suddenly become autocratic and seize every ounce of individual liberties.