The US Dollar’s Unchallenged Power over BTC and CBDCs: An Analysis

November 15, 2021 | 

No other fiat currency can rival the U.S. dollar’s universally acknowledged dominance; this is a fact one cannot doubt after the 1944 Bretton Woods Agreement put the dollar to the highest financial pedestal. Since then, its monetary reputation and value have been untouched, ever-growing to date and, expectedly, for the decades to come. But while the dollar remained seated far and above its global peers, the imminent domination of digital currencies brought in some serious concerns that might be of great detriment to the former’s established value.

This emerging discourse voices out a collective sentiment from analysts who foresee an impending plunge in the dollar- all made possible by the United States’ fluctuating international trade, China’s tightening monetary stronghold, and the eventual digitization from fiat to crypto. These interweaving sets of challenges permeate deeply at the foundation of the global financial system and are predicted to undermine the existing financial balance.

As these threats continue to confront the overall financial system, digital currencies are then questioned for the role they play in the development of a new global monetary structure. But even if this is the case, some still believe that the US dollar cannot be toppled easily as a global reserve currency. Here’s why.

The United States: An Economic Icon

The U.S. dollar’s status is primarily built from the country’s massive geopolitical influence and large diplomatic relations. With almost all nations closely linked to the United States in terms of international trade, it later then earned a hegemonic monetary status, which was first examined by Michael Hudson in his 1972 book titled Super Imperialism.

Several decades after it was published, many of Hudson’s critical analyses about the economic powerhouse remain true. For one, the dollar still stands at the forefront of large reserves in global trade. An outstanding Forex market cap of 40% is allocated directly to the dollar, which is just an addition to its existing share of over 88% in international trade.

An economy that freely prints the world’s monetary standard is in itself a privilege. International engagements, such as import-related transactions, only ever tighten its hegemony and keep bottlenecks at bay. With the United States’ self-sustaining mechanism, the country is able to keep its supremacy without losing its ability to purchase imports or regulate its existing deficits.

Another attestation of the dollar’s dominance is the constant need of centralized institutions for dollar liquidity. Governments, banking units, and corporations fuel the dollar’s momentum by continuously demanding newer dollar-denominated debt. In turn, this relatively simple access provides the United States the power to exercise the dollar far beyond what is necessary.

The U.S. Dollar: A Tired Relic?

True enough, the dollar’s significance can be stretched widely as it is also viewed as geopolitical leverage. Any country in conflict with the United States may be denied any access to the dollar or, worse, to the global financial system. Such a scenario potentially raises political concerns and is predicted to bring forth unresolvable damages on foreign and diplomatic relationships.

This kind of power is already materialized through economic sanctions that the United States utilizes as a tool to pressure other nations. But while there is an immense power that the U.S. holds over other countries, its dominance can only go at how far other nations will allow it. Abuse of power and unnecessary deployment of sanctions might strip the U.S. of its status and respect, which may be an eventual narrative if other nations decide to do so.

Digital Alternatives and their Feasibility

The US Dollar’s Unchallenged Power over BTC and CBDCs: An Analysis

The dollar is an economic force, a defacto condition made by the long-running momentum present in international trade. Whether we like it or not, this secures its place as the supreme currency that continuously tightens its fortification no matter how far and to what extent the United States takes its power. A dollar-dependent nation, for example, cannot simply leave the dollar and resort to an alternative, more especially if it does not warrant any substantial gains like the conventional way.

While uncertainty and reluctance will keep the dollar at its current position, the rise of Central Bank Digital Currencies (CBDCs) and their innate mechanism to facilitate faster and efficient exchange introduce a serious market competition. China, for example, was deemed by a number of analysts as a viable competitor in challenging the dollar’s dominance.

Chief blockchain scientist Omri Ross had this to say, “While the Chinese economy still trails behind the Western world in most per person measures in the short term, an aggressive expansionary approach to innovation in physical and digital infrastructure coupled with substantial investments in emerging markets has positioned the impending ‘digital yuan’ as a natural contender to the dollar.”

If the second-largest economy manages to leverage its accelerating economic control and materializes its goal of developing a concrete infrastructure for digital currency, then it would not be long until it gains an unrestricted influence over multilateral trade and completely evades sanctions.

While others are expressing their positive expectations for China’s eventual rise, some analysts begged to differ. In an argument presented by John Deacon, Dragon’s financial services lead, he believed that there are still restrictions that these visions can bring about. He emphasized that “their [CBDCs’] ability to disrupt the global status quo of the monetary system will be limited by the current increase in localization (due to trade wars and coronavirus), and by the need to protect their local banking sector. This opens up a niche for a non-CBDC digital currency (i.e. one that is not partisan to or affected by economic or trade policies of a single country or bloc) to serve as a store of value and medium of exchange.”

Mechanic Discrepancies

As long as the correlation between fiat and crypto, such as the heavily debated BTC to USD, is still diffused and abstract, the possibility of overthrowing the dollar will remain implausible. Very much so, the hegemonic status present in the dollar is something that only another fiat currency can challenge, not a digital one or any alternative that holds no flexibility. That would be the case, except only if a multipolar setup that bears no hegemonic recognition to any currency arises from overly saturated market competition.