In a recent article featured in The Hill, Chris Larsen, co-founder and executive chairman of Ripple, suggested that the lack of clear regulatory clarity on cryptocurrencies and digital assets has put the United States in the position where it may lose its place as the global reserve currency once China tokenizes the Yuan.
At the very least, the loss of such stature, or the presence of a significant digital alternative, to which the United States has no answer, could enable nation-states to bypass the USD as the global reserve currency, casting the current unipolar currency structure into doubt. Some of you may be nodding your heads and saying, good. But I would like you to consider the effect that this would have on the application of American coercive power on the world stage and what could follow after that power diminishes.
Larsen presented a nightmare scenario wherein American firms and government organizations find payments blocked or reversed when attempting to deliver or funds abroad. While this scenario is alarming, I don’t feel that he went far enough in describing just how serious the implications of this loss of stature could be.
We have been living in a unipolar world since the fall of the Soviet Union, brought down, arguably, by American soft power. And we are currently living in what some scholars have called the Pax Americana or the American Peace. The Pax Americana refers to the era of relative peace between the major powers, enforced by American coercive mechanisms. Earlier eras of peace between major powers were the Pax Britannica, enforced by the British Empire, and the Pax Romana by the Roman Empire.
Soft power refers to the application of non-coercive measures to cajole other countries into behaving in a desirable manner. A real-world example of American soft power during the cold war would be the broadcasting of pro-western messages via Radio Free Europe into the Soviet Union. The alternative to the application of soft power is often formal military intervention or economic sanctions (hard power). In all but the most extreme examples, formal military intervention is not an option with nuclear-capable nation-states.
With belligerent nations where military intervention is not an option – Russia with the Crimea annexation or election interference – economic sanctions are among the few tools we have to punish them. An action like Russia’s annexation of Crimea, or any other such aggressive expansionism, must be weighed against the potential impact of American economic sanctions. Absent effective sanctions, the only other coercive mechanism available is often formal military conflict, which essentially means that there is no option unless the issue is important enough that the American’s are willing to risk a nuclear exchange.
Prior to the Pax Americana, tensions between major powers had erupted into the First and Second World Wars, resulting in 20 million deaths during the First World War and 85 million during the Second World War. Absent a global policeman, we saw two of the bloodiest wars in human history. When the British Empire’s coercive mechanisms waned, the First World War followed, marking the end of the Pax Britannica.
American sanctions have not exclusively been applied on adversaries; they have also been used to curtail undesirable behavior by allied nation-states. During the Suez crisis, the United States threatened sanctions against Britain, France, and Israel if they did not withdraw their forces from Egyptian soil. Britain and France withdrew, with Israel following shortly after.
Larsen indicated that digital currencies have the potential to wrest away the dollar’s status as the global reserve currency:
For China, this is a once-in-a-century opportunity to wrest away American stewardship of the global financial system, including its ultimate goal of replacing the dollar with a digital yuan.”
Larsen also argued that the American response to China’s digital currency development has been ineffective, and may even run contrary to American interests:
“There is still no digital dollar initiative, despite thoughtful advocacy from the likes of former CFTC commissioner J. Christopher Giancarlo. U.S. regulators have blessed only two blockchain protocols, both controlled by miners in China, which puts American blockchain companies at a huge disadvantage.”
Hamstringing American companies like Ripple, while giving foreign-controlled blockchain technology free rein, is effectively handing dominance of this potentially ubiquitous technology to foreign adversaries like the Chinese. We may be seeing the first major slip in the gradual decline of American coercive power on the world stage. And the wound that caused this decline would be largely self-inflicted.
Without the power inherent in controlling the world’s reserve currency, coercive mechanisms like economic sanctions will be less effective than they already are. Belligerent nation-states would no longer have to weigh aggressive territorial expansion against the prospect of American treasury sanctions like the kind levied against a Russian aluminum firm, which according to The Economist, prevented it from “accessing the dollar-based financial system,” or the heavy sanctions on Iran over uranium enrichment.
With a competing digital-Yuan, foreign adversaries could bypass the American system almost entirely and deal exclusively with the Chinese. As we drift further from a unipolar world, alliances may form, delineating the world into power blocs of the kind we saw during the Second World war with the Axis and Allied powers. And all it would take to ignite the tinder of conflict would be a tiny spark from an event similar to the assassination of Archduke Franz Ferdinand.
At the very least, the diminishing of American coercive power on the world-stage would make a formal military conflict between non-nuclear powers far more likely, and it would enable nations with nuclear arsenals like Russia, and China, to expand far more aggressively than they have thus far.
Digital assets are already being used by rogue nation-states to bypass American sanctions and currency restrictions. A recent article in the Washington Post discussed the move to seize 280 cryptocurrency accounts used by North Korean hackers to flout American sanctions and fund the regime’s weapons programs.
Cryptocurrencies like XRP have also been represented in these thefts periodically, but nowhere near the extent of Bitcoin and Ethereum. There are several reasons that North Korea’s state-sponsored hacking group would want to use Bitcoin or Ethereum to launder funds over other cryptocurrencies. The currencies are fairly liquid and popular with exchanges that lack effective KYC controls (whereas XRP may not be). It may also be that the exchanges that were breached didn’t have large XRP reserves.
Cryptocurrency theft by North Korean Hackers outlined by
blog on the recent DOJ Civil Forefiture complaint
I have trouble believing that it’s a simple economic coincidence that Chinese intermediaries are facilitating these currency transfers (with a final preference for BTC) while also controlling the majority of the hash rate for the Bitcoin blockchain. These transactions help prop up the North-Korean regime, preventing its collapse and absorption into the Western-friendly South-Korean nation-state. Such an event would put a large, technologically advanced, pro-American country right on the Chinese border. And if the Americans ever became annoyed enough to attack Bitcoin (attempting to censor, roll back, or block transactions) there’s nothing they could do because the mining hash-rate is firmly in the hands of mainland China.
China has also proposed the creation of a common cryptocurrency with other BRICS (Brazil, Russia, India, and South Africa) countries:
“China’s central bank is reported to be working on a new digital currency, though details are sparse. Some speculate that it wants to get a head-start on America in building whatever international system emerges for managing payments in central bank-issued digital currencies. It discussed creating a common cryptocurrency with other BRICS countries (Brazil, Russia, India and South Africa) at a recent summit. China may end up doing Bitcoin with an authoritarian twist: instead of anonymity it may want all data to be trackable and centrally stored.”
All the while, regulatory clarity is withheld as prominent American companies like Ripple sit in limbo, waiting for the slow wheel of government to turn. The consequences of such regulatory foot-dragging may be far worse than the impact on the pocketbooks of a few XRP holders. In delaying the local development of disruptive technologies, the incumbents and their friends in government may well be handing foreign powers dominance in a future ubiquitous technology. In the worst-case scenario, American power on the world-stage could unravel, and conflict would follow as other powers rush in to fill the vacuum created by its absence.