Why the crypto sector should be home to a new global reserve currency

For close to 80 years, the US dollar has been the world’s global reserve currency.

More than 60 percent of foreign exchange reserves in banks worldwide are in US dollars, while 40 percent of world trade is conducted in dollars, which compares with the United States’ total share of 10 percent of world trade.

This situation gives the United States a huge advantage in the world economy. Unlike other countries, the United States does not need to hold reserves of US dollars that it can sell on the open market to support its own currency should it begin to fall, nor does it need to hold large amounts of the dollar to meet its foreign currency . commitments.

Instead, should the US come up short on its foreign bills, it can simply print more money. And print more money it has done. Dollar-based debt is now more than $13 trillion worldwide, leading to an inflationary situation that has reverberated around the world over the past year.

But when inflation rises, the value of the dollar falls, and when the value of the dollar falls, so does its position as the world’s reserve currency.

The threat from the latter has pushed the US central bank to raise interest rates aggressively in 2022. This has served to defend the dollar, whose current strength against the euro and pound is at historic highs.

Money, currency and power

The strength of the dollar is not only economic – it also gives the US great political influence. This was keenly felt in Russia recently, where more than $600 billion of US dollar reserves were effectively frozen by the US.

While the United States has major allies in this particular brinkmanship, America’s ability to crush economies with the stroke of a pen is a growing concern for developing countries.

In March, a coalition of Eurasian countries agreed on the need for a new, commodity-backed global reserve currency, while in June the Brics group of Brazil, Russia, India, China and South Africa also called for an end to the dominance of the US dollar. .

In both cases, the moves were unsurprisingly led by Russia, with Foreign Minister Sergey Lavrov repeatedly calling time on the dollar. China has also made no secret of its intention for the yuan to become the world’s reserve currency – it has been Beijing’s publicly stated plan since 2009.

While this is not an impossible scenario for the yuan, based on the size of China’s economy, it is made impossible as the government continues to apply strict controls over the currency.

In fact, the only global fiat currency that has a chance of replacing the dollar is the euro, which currently accounts for about 20 percent of global foreign exchange reserves. Ironically, lack of fiscal harmony across the region is the primary obstacle here.

Crypto: decentralized, objective and free

However, neither the yuan nor the euro would be an optimal solution for Russia or anyone outside of Europe or China.

As we’ve seen with the US dollar, the country that wins this currency game can wield an enormous amount of power in global politics, and few want to see that power returned to Europe—less still to an authoritarian regime.

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Cryptocurrencies — in pictures

Rather, it is the cryptocurrency sector that offers the greatest promise as the home of the world’s new global reserve currency.

Decentralized and not subject to any single government policy or sanction, cryptocurrency is the world’s first truly objective mode of value and exchange that – if allowed – can cross all borders.

As long as it resists the kind of centralized control that compromises fiat currencies, cryptocurrency as a global reserve offers an economic and political opportunity perhaps unparalleled in history.

Countries such as El Salvador and Iran are already experimenting in the arena, with the latter recently approving the use of cryptocurrency for imports to mitigate US sanctions.

In a world where countries cannot be controlled by a major economy, we may find that the playing field for trade is completely leveled.

Some would argue that this can be dangerous.

Ultimately, however, we are moving into a globalized, digital-first world where it will be very difficult for the US to maintain its global control.

Instead of ending up in a situation where it has none at all, perhaps it would behoove the US and its regulators to come to the table and legislate a world where cryptocurrency occupies a prominent position.

Stefan Rust is the founder of Laguna Labs, a blockchain development house, and former CEO of bitcoin.com

Updated: 7 September 2022, at 04.00