Beyond the Dollar

The global economy is at a crossroads with the US dollar’s future as the world reserve currency facing fresh challenges. For decades, the stability and dominance of the dollar have given the United States significant advantages in global trade, investment, and geopolitical influence. However, as emerging economies like China and India rise in prominence, their currencies are gaining traction in international transactions, challenging the dollar’s hegemony.

China, in particular, has been busy over the past few months, actively promoting the Yuan and seeking to challenge US dominance in the global financial system. Through currency swap agreements, trade settlements in Yuan, and the launch of its digital currency, the eRMB, China is positioning itself as a formidable competitor to the dollar.

As well as establishing trade deals, China is home to the New Development Bank (NDB), a rival to the World Bank and IMF created by BRICS members. Its current head is the ex-president of Brazil, Dilma Rousseff, who was welcomed to the post in Shanghai by the current president of Brazil, Luiz Inacio Lula da Silva, earlier this month.

A few days ago, Rousseff announced that the bank would be moving away from the US Dollar, saying, “It is necessary to find ways to avoid foreign exchange risk and other issues, such as being dependent on a single currency, such as the US dollar. The good news is that we are seeing many countries choosing to trade using their own currencies. China and Brazil, for instance, are agreeing to exchange with RMB and the Brazilian real.”

Adding, “At the NDB, we have committed to it in our strategy. For the period from 2022 to 2026, the NDB has to lend 30% in local currencies, so 30% of our loan book will be financed in the currencies of our member countries. That will be extremely important to help our countries avoid exchange rate risks and shortages in finance that hinder long-term investments”.

The shifting dynamics of the global economy are further complicated by ongoing geopolitical tensions, including the US-China trade war, sanctions against Russia, and OPEC’s refusal to increase oil production to ease energy costs for the US and Europe. These conditions challenge the US as it strives to maintain its world reserve currency status.

Around the same time, Donald Trump, in an interview with Fox News, said, “China wants to change the standard, the currency standard. And if that happens, that’s like losing a world war. We’ll be a second-tier country. What’s going on? We’re losing. If we lose our currency…that’s the equivalent of losing a world war. Our currency is what makes us powerful and strong.”

The implications of a shift in the world reserve currency are far-reaching. A change could impact global trade, investment flows, and geopolitical power dynamics. It could also challenge countries holding significant US dollar reserves, as a potential devaluation could impact their wealth and economic stability.

Understanding the battle raging around the dollar’s status helps place the present US clampdown on crypto, particularly stablecoins, in context. While the US can use sanctions, increase tariffs, and limit access to dollars in a trade war with China, it has no control over the use of crypto.

Although the market is relatively small at present, it has the potential to grow exponentially and reduce the power of the US to control global trade. It’s no coincidence, therefore, that as the US is imposing harsher conditions on crypto projects, with the SEC targeting many of them, China is seeking to establish Hong Kong as a regional hub for crypto.

Stablecoins have attracted much criticism from regulators because they could serve as an alternative to traditional reserve currencies, offering a digital, decentralized, and stable form of currency that could be used for international transactions. Some stablecoins, such as Tether and USD Coin, are already widely used in global transactions, particularly in the cryptocurrency space. This has raised questions and concerns about their impact on the global financial system, including issues related to regulation, transparency, and potential risks to financial stability.

As the SEC continues down its warpath against crypto, more projects are looking into moving their operations to Asian countries. This has yet to escape the notice of politicians in the US who last week introduced legislation to remove the head of the SEC, Gary Gensler, and are seeking to change course and embrace the technology before it’s too late.

Over the past year, the conversation around crypto regulation has shifted from viewing it as a standalone issue to recognizing its potential role in helping to save the US economy and maintain its competitive advantage against China and other BRICS nations. As the battle for the world reserve currency intensifies, cryptocurrency and stablecoins are emerging as key players that could disrupt the traditional financial system and help shape the future of global finance.

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