Could Crypto Decentralize the Global Financial System?

In Neal Stephenson’s Quicksilver, when a fictional Issac Newton is haggling over the purchase of a prism in a London market, the negotiation is not about price, but the means of exchange.

The seller first requests payment in the global reserve currency of the 17th century — Spanish pieces of eight — and when Newton declines, French Louis d’or and then German Joachimthalers.?

But Newton only has the local currency: “As you, sir, are English, and so am I, let us use English means.”?

“You wish to trade cheese? Tin? Broadcloth?”?

Newton clarifies he wishes to pay with English shillings, which the seller dismisses as “the stuff you throw to beggars.”

Today, offering to make a cross-border transaction in anything other than dollars might elicit a similarly dismissive reaction: As a means of exchange, the US currency remains more dominant than even pieces of eight in their 17th-century heyday.?

According to BIS data , roughly half of global trade is conducted in US dollars and, most impressively, the dollar is one side of nearly 90% of global currency transactions.

If you want to exchange, say, Thai baht for Malaysian ringgits, you’ll have to exchange the baht for dollars first, and then the dollars for ringgits.

There’s been lots of talk that that is about to change, of course, and that talk is likely to accelerate, if for no other reason than Zoltan Pozsar is back: The big-picture thinker of international financial plumbing has re-emerged from gardening leave following the downfall of his previous employer, CSFB.

His time off has not made him any more confident in the US dollar.

In his first public appearance since leaving CSFB, Zoltan prophesied the end of the dollar’s reign: "Out of one reserve currency we will have many."

And as cross-border payments revert back to something more like a 17th-century London market, he expects that a "re-monetization of gold" is inevitable.

That does not mean the overthrow of the dollar that Bitcoiners have long anticipated is imminent — it’s likely to be more gradual and orderly than that.

Nor is it likely that the dollar is replaced by bitcoin.

But the revolution in international finance will be crypto-adjacent, at least: CBDCs, stablecoins, and tokenization all have roles to play.?

Possibly leading roles, according to Zoltan.

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Pay as you are

Hard-money types have been seeing irrefutable signs of the dollar’s end times ever since the US went off the gold standard in 1971.

They have been living in perpetual disappointment as each sign has turned out to be a mirage.?

But in the wake of Russia’s ouster from the US dollar system, the omens have been getting more concrete.

China has been paying for Russian commodities with yuan, for example, and Ghana is paying for Russian oil with gold.

It’s inspired some crypto-y solutions, too: Iran and Russia are cooperating on the development of a gold-backed digital token for use in cross-border payments.

(Even Zimbabwe, that paragon of responsible monetary policy, has issued a digital token backed by gold intended for payments.)

That’s small potatoes relative to global trade, however: Russia only accounts for something like 2% of global GDP.

But the governments of the second and sixth largest economies (China and India) have been increasingly promoting their currencies as a replacement for the dollar in cross-border payments.

It’s been relatively slow going: China remains reluctant to fully expose the yuan to free-market forces, and exporters remain reluctant to accept rupees in exchange for their goods. (India was recently forced to pay for Russian oil with yuan.)

The dollar’s status as the global reserve currency remains surprisingly resilient because 1) No other single currency is fit to take its place and 2) The 21st century economy can’t run on a 17th-century cacophony of competing currencies.

Zoltan, however, thinks digitized currency could change this: CBDCs, he says, “will provide the infrastructure rails to speed the process of de-dollarization.”

In his vision, digital-native payment rails will replace the network of correspondent banks that the US dollar system runs on with a CBDC-based network of “correspondent central banks.”

In that case, you’d be able to swap your Thai baht directly for Malaysian ringgits (facilitated by banks with access to CBDCs via bilateral currency swap lines) without having to trade US dollars or touch the US banking system.

The world would need to hold a lot fewer dollars, if so.

For real this time?

Zoltan makes a compelling case for de-dollarization, but the dollar’s demise has been declared so many times before, I can’t help but be a little skeptical.?

Still, lots of governments seem to think he may be on to something: A report out this morning suggests 93% of central banks are at least considering the possibility of issuing a CBDC.?

The US is considering it, too, although they may be the most reluctant of the bunch.

But maybe not for long: To retain the “exorbitant privilege” of issuing the world’s reserve currency, the US may be forced to adopt some crypto-adjacent practices, like CBDCs and tokenization.

If they want things to stay as they are, things will probably have to change.

Written by?Byron Gilliam

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