How Crypto Will Reinforce Dollar Dominance

No, really! Far from marking the demise of the world’s reserve currency, decentralized finance may make it even more important

You’ve heard it all before: tyranny on the march, America in decline and the dollar headed for the ash heap of history as Chinese yuan and exotic crypto currencies offer protection against U.S. profligacy and a widening net of Western sanctions.

But maybe not. In fact, the dollar's best days may still lie ahead if U.S. lawmakers stop pretending they can block the building wave of technological progress.

There are lots of reasons people choose dollars even amid rising doubts about America’s bitter politics and mounting debt. In fact, there are many signs that those who are trying to skirt U.S. sanctions or taxes still understand the advantages of the dollar itself. And if the new models of distributed finance make dollars more accessible, more convenient and more useful, then the demand for good ol’ greenbacks (foldable and virtual) will surely rise.

There’s plenty of work ahead, but first let’s run through the world’s shortest primer on crypto currencies.

Once upon a time, value was transferred in physical tokens like shells or coins, which anyone with a pocket could accumulate and trade at the nearest market for eggs or clay pots or shoes. Later, banks offered to store money in accounts. If you shared enough personal details for the banker to trust you, your money could be sent across town or around the world to buy silk, spices or options on the Nikkei.

But the account-based system that works so well for so many of us, still leaves some 1.5 billion people “unbanked ,” because they have no means of identifying themselves, no traditional credit history, or easy access to banking services. It’s also an incredibly expensive and cumbersome system of fees and correspondent banking relationships that most of us never see even if we wind up paying for it indirectly with every check, swipe and tap. Credit card transactions represent a $160 billion business annually in the United States alone.

The combination of distributed ledgers and digital currencies have already begun to move value cheaply, securely and directly from buyer to seller without the costs and delays of an intermediating broker or bank. Some folks like Bitcoin as a possible hedge against inflation; others prefer Ethereum for the potential to embed “smart contracts ” that make transactions even cheaper and more reliable.

Most of the current plethora of crypto currencies will likely fail, but we are headed for a world in which traditional fiat currencies like dollars will be competing with these new alternatives.

And if the new models of distributed finance make dollars more accessible, more convenient and more useful, then the demand for good ol’ greenbacks (foldable and virtual) will surely rise.

Sure, there are still lots of details to work out so that the cheap and convenient transactions on a distributed ledger will still protect your privacy and allow good guys to catch bad guys. There are also concerns about how governments might manage monetary policy or protect financial stability if people choose to pull their bank deposits in a panic.

But there are lots of folks hard at work on potential solutions. The Bank of International Settlements, for example, has tested a system that allows buyers to remain anonymous, but generates records on sellers, who have to pay taxes. As for banks, they would most likely distribute digital cash much as they do physical cash today, even as they made loans and managed traditional transfers.

In many ways money reflects the needs and values of the countries that issue them. The Sand Dollar, a crypto currency issued by the Bahamas in 2020, was an obvious solution for the challenge of cash distribution across 700 islands. China’s digital yuan appears designed to reclaim government control over a payments systems dominated by a private duopoly.

The Fed has been careful not to move too fast amid narrow-minded ?political skepticism mounts about an innovation some worry will reinforce the power of Washington and Big Tech. But they had best not wait too long, because the task ahead is daunting. A digital dollar, when it emerges, will have to reflect democratic protections from government intrusion, while also encouraging innovation, protecting national security and reinforcing financial stability.

These are tensions embedded in current laws and regulations that govern current paper money and there is reason to believe the new technologies can manage these tradeoffs at least as well if not better. It’s hard to imagine the Fed refusing to issue a digital dollar when 39 countries have either launched a pilot or a full-fledged version. ?

Meanwhile, the demand for ‘stable coins’ issued privately but linked to the U.S. dollar continues to grow.

How is this possible given America’s domestic turmoil and overstretched balance sheet? Above all, the dollar is still backed by the world’s largest and most innovative economy, which boasts the deepest and most sophisticated capital markets and a mostly trustworthy system of courts and regulators. That’s why dollars are the overwhelming top choice globally for government reserves, international transactions and debt issuance.

But what is especially telling is that those trying to avoid U.S. regulations still love dollars. A Russian smuggler brokering the sale of Chinese electronics to the sanctioned manufacturer of Kalashnikov chooses Tether, a crypto currency linked to the dollar. Venezuela’s sanctioned oil giant PDVSA reportedly prefers the same. Argentinian savers , ravaged by inflation, overwhelmingly prefer dollar stable coins to other crypto alternatives. Even after a crackdown on crypto currencies in China, a Hong Kong-based stable coin backed by U.S. treasuries has met with huge success.

Imagine a currency that combines the advantages of the dollar and the convenience, cost and protection that carefully designed digital ledgers can offer. In a world of bad governments, bad economic policies and bad guys, America’s currency starts to look more attractive than ever.?

But only if we understand our advantage and seize the moment.

?

?

?

?