As the war in Ukraine continues and the United States takes an aggressive approach towards China and Bitcoin, both countries are actively trying to erode the US Dollar’s position as the anchor of the international financial system.
The US dollar remains America’s ultimate superpower, which has given it unparalleled economic and political influence. Still, efforts by Russia and China to disengage have important implications.
Decline of US Dollar dominance
During the recent summit between Vladimir Putin and Xi Jinping, the Russian President supported using the Chinese yuan for settlements between Russia and countries in Asia, Africa and Latin America. Central banks around the world hold fewer US dollars in reserves, and trade between Russia and China is increasingly settled in the yuan.
The coalition of advanced economies formed by the Biden administration in its economic fight against Russia poses challenges for countries looking to move away from the US dollar and adopt other stable currencies such as the euro or pound.
EU efforts to increase the euro’s international role, spurred by Trump’s 2018 withdrawal from the Iran nuclear deal, have yet to bear fruit due to doubts about the euro’s future.
China’s efforts to expand the role of the yuan internationally have also encountered obstacles. The value of the currency is still influenced by the whims of the government rather than by market forces. Liberalization of China’s financial sector could make the yuan a true US dollar competitor. But this will require a shift towards market-oriented policies that run counter to Xi Jinping’s domestic goals.
Exploring Alternatives: International Payment Systems
Despite the strong dominance of the US dollar, its share of global central bank reserves has continued to decline, falling from nearly 70% two decades ago to below 60% today.
Countries are increasingly looking for alternatives. Europe and China are working on an international payment system outside the US dollar-dominated SWIFT. Saudi Arabia is considering fixing the price of its oil in yuan. And India is buying most of its oil from Russia in non-dollar currencies. In the meantime, digital currencies such as China’s central bank digital currency may provide another opportunity.
While the US Dollar is unlikely to be replaced by a single option, it may experience a slower decline due to these multiple options.
Author and investor Ruchir Sharma noted that for the first time in memory, the US dollar has weakened rather than strengthened during the international financial crisis. If the US dollar’s unique position fades, the US will face an unprecedented reckoning.
Its politicians have become accustomed to spending without worrying about the deficit and relying on the expansion of the Federal Reserve’s balance sheet.
Bitcoin’s Role in a Multipolar World
With countries like Russia and China seeking to undermine the dominance of the US dollar, the evolving global financial landscape presents an opportunity for cryptos like bitcoin to play an increasingly important role.
As the world moves towards a multipolar currency environment, the decentralized and borderless nature of bitcoin could provide an attractive alternative for countries seeking to reduce their dependence on the US dollar.
Bitcoin’s potential impact on the international financial system lies in its ability to facilitate transactions without relying on central authorities. This makes it particularly attractive to countries seeking to bypass traditional financial channels and maintain their economic sovereignty. Additionally, bitcoin’s transparent and decentralized ledger can provide a level of trust and security over government-controlled currencies.
In recent years, countries facing economic sanctions or currency crises have turned to bitcoin. They have been able to circumvent sanctions and maintain their purchasing power.
For example, during the recent protests in Nigeria, bitcoin provided an alternative means of support when the government attempted to block access to funds. In Venezuela, amid hyperinflation, people have turned to bitcoin as a store of value.
The growing acceptance of bitcoin, driven by technological advances such as the Lightning Network, could further enable cross-border transactions and reduce reliance on traditional banking infrastructure. It will empower millions of people who currently do not have access to financial services. Especially, in regions like Africa, where a large proportion of the population remains unbanked.
However, it is important to acknowledge the challenges associated with adopting bitcoin as a mainstream currency.
Factors such as price volatility, scalability and energy consumption are yet to be overcome. Additionally, the regulatory framework must adapt to accommodate the use of crypto. They must also address money laundering, tax evasion and investor protection concerns.
The United States must prepare for this shift toward a multipolar currency environment. Countries are already exploring a number of options to save themselves from becoming the next Russia. Failure to adapt to these changes could lead to consequences for America’s economic complacency.
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