A digital threat to dollar dominance

The United States remains focused on the challenge to dollar dominance from other traditional currencies but does not understand how new digital-based currencies can erode the position of the dollar

FEAR and lack of knowledge of cryptocurrency at the highest levels of the US government pose a major threat to national security. The emergence of the technological solution provided by the Bitcoin protocol in 2008 (and the myriad of blockchainbased protocols that arose thereafter) and related payment channel networks (PCNS) (global peer-to-peer wealth transfer networks) has opened a Pandora’s Box that forever changes global peer-to-peer wealth storage and transfer. Add to that the rapid advancement of artificial intelligence capable of nearly any solution creation in PCNS and the global monetary system is about to change dramatically.

Yet politicians on both sides of the aisle, as well as much of the national security establishment, do not understand how digital currencies work and are reluctant to take the proactive means to ensure the continued use of the US dollar as the de facto global currency in the context of these new technologies. The current resistance to exploring the development of a US Central Bank Digital Currency including legislative efforts to prohibit the US Treasury from taking steps to explore its feasibility, is based on misinformation about how digital currencies function and fears about a loss of privacy rights or a government’s ability to control people’s ability to purchase goods and services. The attitude seems to be that the US government has the ability to single-handedly stop global technological development and freeze a pre-digital international monetary landscape in place in perpetuity.

Such efforts are short-sighted and could threaten the position of the US Dollar in the global financial ecosystem. Since the Second World War, a key instrument of US national power has been the global demand for a stable currency in which long-term trade and investment transactions can be denominated and wealth can be stored. The United States benefits from this global demand for its currency—with up to 80 percent of transactions denominated in the dollar—for it maintains the dollar’s stability. Over time, this stability from global demand has led to lower inflation, lower interest rates for US businesses and consumers and has allowed the United States to run its fiscal and trade deficits without incurring negative consequences. The United States also gains enormous leverage from having so much of the world’s economic activity run through the dollar ecosystem in terms of reaping the transaction fees for such activity, accumulating data on global trade and using access to US Dollar denominated accounts and the US financial system as a tool of compellence.

While much of US national security establishment focuses on whether another national currency can displace the position of the dollar, for example, the Chinese Yuan (renminbi), much less attention has been paid to the creation of new mechanisms for facilitating trade, investment, and wealth storage in US Dollars in the context of the global movement towards digital currencies and PCNS. Similarly, there has been a great deal of attention paid to non-national or democratized cryptocurrencies like Bitcoin as a threat instead of an opportunity. While these cryptocurrencies face challenges in terms of scaling and price stability in ways that facilitate the millions of daily transactions that traditional national currencies handle easily, from the purchase of a cup of coffee to setting up a credit line for millions of dollars, entrepreneurs are finding ways to utilize these new technologies in other forms of wealth storage and transfer. One such method is the development of a stablecoin: a digital currency that pegs its value to an external reference with relatively stable value.

Today, entrepreneurial companies outside and within the United States are using US currency to do something the United States should be doing—creating cryptocurrency-based US Dollar-secured wealth storage and transfer for these protocols and networks as well as US dollar-based on and offramps. Ifinex, a Hong Kong-based company, has created stablecoins linked to all major world currencies and claims that its “US Dollar Tether” (USDT) stablecoin is backed on a 1:1 basis with the US dollar. In other words, a Tether stablecoin is theoretically equivalent to a “regular” US dollar because the company claims to be able to hold an equivalent amount of US Dollars and US Dollar equivalents to guarantee its value. USDT provides a dollar-secure wealth storage and transfer solution and the ability to pay for goods and services in a stablecoin that others will accept as having a defined, stable value. USDT also serves as an on- and off-ramp for those who hold other types of cryptocurrencies (such as bitcoin) to be able to convert them to avoid the price fluctuations of those cryptocurrencies without converting to national currencies. Nearly half of bitcoin trades are now connected to USDT. In 2022, ifinex claimed that the USDT stablecoin was used to process some $18.2 trillion in transactions and USDT is seeing growing acceptance as a dollar substitute: For instance, it can now be used to settle tax payments in the Swiss canton of Lugano.

So, what’s the problem? Doesn’t the use of USDT simply reinforce the position of the US Dollar? There are several problems with this assumption. First, non-us based firms like ifinex, not the US Treasury, are defining and setting the rules for the uses of digital currencies tied to the US Dollar. Second, these transactions, while supposedly linked to the US Dollar, occur outside the oversight and supervision of the US financial system and provide a useful workaround to avoid US sanctions against companies and countries designed to prevent them from accessing US Dollars for trade and investment. Third, because the US Dollars and equivalents never change hands (only the stablecoins do) the United States has less and less visibility into the movement and use of US currency outside the United States. Fourth, these thirdparty stablecoins carry the corporate risk of the issuer, and as their use proliferates, a corporate event that has nothing to do with the stability of the US Dollar could undermine global confidence in US Dollars generally. Finally, because third parties and not the United States make decisions about their stablecoins, the long-term threat is that as particular stablecoins like Tether gain greater acceptance and recognition, the value of the stablecoin can increasingly be untethered from the US Dollar (in favor of other currencies or instruments).

There is a window of opportunity. Right now, stablecoins like Tether are being developed while the US Dollar remains the preferred global store of value and where holders of cryptocurrencies still seek the option to assess the value of their holdings against the dollar. But if the United States fails to embrace these protocols and the PCNS related to them, then it will cede control to someone or something else (including possibly an enemy state) resulting in a massive, irrevocable loss to the United States. Tether is a warning foreign companies are taking advantage of US Dollar dominance and US technological advances. The United States is not. Sticking its proverbial head in the sand and hoping that cryptocurrencies and stablecoins will die a quiet death is a pathway to losing global US Dollar dominance.