Excerpt: “If cryptocurrencies continue to mature and advance in technology and therefore in popularity, then it is very likely that it could pose a greater problem for the US hegemonic power through the US Dollar as the world’s reserve currency. International economic sanctions could become avoided by a nation harnessing virtual currencies.”

 

Keywords: cryptocurrency, financial system, US Dollar, hegemony, sanctions

Cryptocurrencies as a challenge to U.S Global Hegemony. A virtual currency for a post-American world?

“Thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in let’s say the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the late twentieth century… Pencil in the phoenix for around 2018, and welcome it when it comes.” The Economist, January 9, 1988.

 

 

Three decades ago, in 1988, not long after “Black Monday” when stock markets crashed in the U.S and around the world, an article titled “Get ready for a world currency” published in the Economist discussed -in what must have seemed like an outlandish prediction- a completely new type of global currency. The cover of the magazine depicted a phoenix rising from the ashes of paper money, holding a new global world currency. In 2009, the first virtual currency was created.

One must say that there are few cultural phenomena in living memory that have been as intriguing and fascinating, but also as poorly understood, as virtual currencies, also known as cryptocurrencies or crypto assets, with Bitcoin standing as the vanguard and the foundational tool in this type of innovative digital instruments. Crypto have improved in the last years to a vertiginous cadence, going practically from being considered in a moment, an issue of science fiction to become nowadays an inescapable reality. The Economist’s prophetic vision in 1988 of the world we were becoming is timelier than ever. Crypto is at a tipping point with more and more people jumping on the bandwagon. But, what is a cryptocurrency?
 
A cryptocurrency is a digital or virtual currency that is secured by cryptography. The word “crypto" literally means concealed or secret and "cryptography" means "secret writing"—the ability to store and transmit data values in a secure format that ensures only those for whom the data or transaction is intended can receive, read, and process the data, and ensure the authenticity of the transaction and participant, like a real-world signature. Crypto assets can be mined or purchased from cryptocurrency exchange platforms, such as Binance, Coinbase, FTX, Gate.io, etc. However, the skyrocketing value of cryptocurrencies has made them popular mainly as trading instruments so far. To a limited extent, they are also used for cross-border transfers (Mexican crypto company Bitso says it now handles 2.5% of remittances sent from the US to Mexico—totaling more than $1 billion annually). As of 2022, global crypto ownership rates are estimated at an average of 4% with over 300 million crypto users worldwide.

It is in the midst of the 2008 Financial Crisis that a man/woman or group under the pseudonym Satoshi Nakamoto created the first starting operating to a world level cryptocurrency which is still leading the crypto market today: Bitcoin. According to CoinMarketCap, there were over 18.9 million bitcoins in circulation with a total market cap of around $1.2 trillion as of November 2021. Only 21 million bitcoins will ever exist. Initially valued at nothing, a single Bitcoin is now ranging between $40000-60000$. From the creation of Bitcoin to the date, many other virtual currencies known as “altcoins” have appeared. As of today, over 14 000 of these “alternative” currencies have been launched worldwide. They include Ethereum, Solana, Cardano, Litecoin, BNB, XRP etc. By November 2021, the overall value of all the cryptocurrencies in existence had reached over $2.48 trillion—Bitcoin represented approximately 42% of that total value.

The concept of decentralized currencies is the defining future of crypto assets and helps understand the mechanics of cryptocurrencies, despite its prima facie complexity; cryptocurrency is simply out of control from the governments and also of the financial entities. It is thanks to their decentralized and nearly anonymous nature, which supports the peer-to-peer architecture and makes it possible to transfer funds and other digital assets between two different individuals without a central authority, that cryptocurrencies have gained immense popularity in the last few years. Crypto owners and traders’ ability to bypass government licensed financial institutions distinguishes cryptocurrencies from centralized currencies such as the USD, the Euro or the Japanese Yen.
 
If cryptocurrencies continue to mature and advance in technology and therefore in popularity, then it is very likely that it could pose a greater problem for the US hegemonic power through the US Dollar as the world’s reserve currency. International economic sanctions could become avoided by a nation harnessing virtual currencies. Former Secretary of State Hillary Clinton gave a strong warning about the emergence of cryptocurrencies on November 2019 during a panel titled “Great Power Competition: The Emerging World Order.”: “One more area that I hope nation-states start paying greater attention to is the rise of cryptocurrency -- because what looks like a very interesting and somewhat exotic effort to literally mine new coins in order to trade with them has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilizing nations, perhaps starting with small ones but going much larger.”

 

Crypto assets as a way to circumvent sanctions

Economic sanctions are some of the most powerful foreign policy instruments the United States and European countries possess to influence the behavior of nations they don’t consider allies. Measuring their effectiveness is difficult, as sanctions rarely achieve all their aims, and usually there are other causes to which changes can be attributed. However, even when the main purpose is not achieved, sanctions may be useful in deterring other actors from similar behaviour. The United States is able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and used in payments worldwide.

To apply sanctions, a government makes a list of people and businesses its citizens should avoid dealing with. Companies are responsible for ensuring that they do not enter into transactions with the sanctioned entities. Anyone caught engaging with a member of the list faces heavy fines. But the real key to any effective sanctions program is the global financial system. Banks around the world play a major role in implementation: they have access to some very important information like where money comes from and where it’s bound, and anti-money-laundering laws require them to block transactions with entities that are under sanctions and report what they see to authorities. It is their job to freeze the accounts and assets of sanctioned people and businesses. But if banks are the eyes and ears of governments, the outburst of digital currencies is making them blind.
 
On the contrary of Banks that have to verif their clients’ identities, exchanges and other platforms that facilitate the buying and selling of cryptocurrencies are rarely as good at tracking their customers as banks are.

But American government officials are increasingly aware of the potential for cryptocurrencies to diminish the impact of sanctions and are amplifying their inspection of digital assets. In October, the U.S. Treasury Department warned that cryptocurrencies posed a serious threat to the American sanctions program and that U.S. authorities needed to educate themselves about the technology. On Feb. 17, the Justice Department announced that it had created a new national cryptocurrency enforcement team, lead by Eun Young Choi, a cybercrime expert who has experience in tracking rogue states such as North Korea, a move that seemed to emphasize that federal prosecutors were paying extra attention to bad behavior among cryptocurrency users. Furthermore, President Biden signed an executive order on March 9 to establish national policies for digital assets. The order explores a broad framework that includes: consumer and investor protection, financial stability, mitigating illicit finance, promoting U.S. leadership in the global financial system, financial inclusion, and responsible innovation.

Iran and North Korea are among countries that have used digital currencies to mitigate the effects of Western sanctions several times before, a trend that U.S. and United Nations officials have recently observed. North Korea, for instance, has used ransomware to steal cryptocurrency to fund its nuclear program, according to a U.N. report. And Iran used digital currency to pay for imports and circumvent oil sanctions.

While forswearing military confrontation with Russia amid Russia’s invasion of Ukraine, NATO and its allies have waged something akin to financial war on Putin’s Kremlin regime. In addition to sanctioning Russia’s oligarchs and seizing their assets in Western countries, the U.S. and E.U. have effectively evicted Russia’s entire banking system from the global financial order. Russian banks can no longer use the international payments known as SWIFT to complete transactions. Will these sanctions push Moscow toward developing alternatives to the US-led financial system?

An alternative for Russia could be China’s cross-border interbank payment system, acronym CIPS which connects participants inside China and out to do trade or investment and then settles those transactions using Chinese yuan. Russia could also find willing partners in other
 
nations targeted by U.S. sanctions, including Iran, that are developing government-backed digital currencies. China, Russia’s largest trading partner in both imports and exports, according to the World Bank, has already launched its own central bank digital currency. On March 17, Russia granted the country’s largest bank, Sberbank, a license to issue and exchange cryptocurrency after being cut off from transferring USD and other Western currencies. Although cryptocurrency like Bitcoin can be affected by macroeconomic factors, it is less susceptible to currency devaluation from geopolitical events.

Some in the crypto industry have pointed out that on-chain analytics and the open-source nature of cryptocurrencies like bitcoin make it simple to track transactions. That means Russians would not be able to carry out transactions unnoticed, they argue.

China’s digital currency and Beijing’s aim to counter the U.S-led global financial system

China is pursuing global dominance in financial technology. In 2019, the President Xi Jinping called upon China to embrace blockchain technology and to increase the country’s investment and focus on the development of blockchain technologies.

The country’s central bank, the People’s Bank of China (PBOC), is developing a digital version of the renminbi that it intends will replace its physical currency. Through this project, Beijing is aiming to advance China’s technical and economic prowess and counter U.S. financial influence around the globe. And while numerous central banks are conducting central bank digital currency (CBDC) research and pilots, China’s effort is unquestionably the most advanced of any large, major economy to date.

Chinese officials call the project Digital Currency/ Electronic Payment (DCEP), and it fits as part of the CCP’s strategy to use “informatization” to “vigorously develop the digital economy” and transform China into a “cyber superpower.” The international aim is long term and more aspirational, driven by Beijing’s sense that progress in digital currency is a critical next stage of geopolitical technology competition.

DCEP also fits into Beijing’s strategic global competition—and conflict—with the United States. Although in public statements, PBOC officials generally focus on the project’s domestic utility, they have sometimes described what they perceive to be its geopolitical
 
implications. At a United Nations information technology conference in New York in 2018, Yao Qian, a digital currency research director at PBOC, presented slides showing how China’s digital currency would work. His ending slide likened digital currency progress to China’s advances in robotics, big data, and artificial intelligence. Yao posited digital currency as part of “the Next War,” referring to an article in The Economist of the same title that discussed technology’s role in the rising tensions between the United States and its major-power adversaries, including China

China is clearly seeking a stronger foothold in the global financial system of the future. Beijing aims to counter the U.S. role as standards setter, cultivate Chinese government leadership in international engagement on digital currency technology, and potentially offer technological know-how to other interested nation. In the race among large economies to launch a state digital currency, China appears to be farthest ahead in testing and scope.
 

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