The Geopolitics of Crypto
As technology changes how money moves, brace yourself for some unexpected power shifts within - and among - countries
(The diligent Research Department here at Leading Thoughts will be away for the next two weeks, so we will suspend publication to avoid angry diatribes unmoored by facts.)
My brother collects amazing ancient coins, which offer an eternal lesson about the nature of value. These mostly bronze and silver tokens were common in daily commerce across the Roman Empire and the emperor's image signaled the geographic reach of his power wherever a coin changed hands. Today some of them command breathtaking prices from numismatists, but not a single one will buy a coffee at the corner store.
From wampum to bills to account entries, money has value because enough people think it's valuable. Historically, it was linked to something of transcendent value like gold or silver. More recently, governments simply require transactions within their jurisdiction to be conducted in the stuff that they print -- and especially to pay taxes. Over time, some start to look more attractive than others.
But now comes a new technology that promises transactions of unparalleled convenience, security and cost without any government involvement. Some versions even commit to limiting supply to protect their value in ways governments never could. And if properly deployed, there could even be a better mix of privacy, security and innovation than the present jumble of financial plumbing that moves money around the world.
Okay, admit it. Many of you had hoped you might not have to think about cryptocurrencies ever since the operatic demise of FTX and conviction of its colorful founder. Sure, it still gets a reliable laugh from friends when you offer to pay your share of dinner in crypto.
Still, you will also have noticed the U.S. Securities and Exchange Commission has now approved exchange-traded funds in major cryptocurrencies that you can hold in your own brokerage account. You may also have raised an eyebrow recently when former president Donald Trump recently announced his support for a somewhat dubious U.S. “strategic Bitcoin reserve.”
Anything that so fundamentally reimagines the relationship around money between citizens and their government is bound to drive political change as well.
The crypto revolution is, indeed, at hand and you can’t avoid it any longer. Total crypto assets are now estimated at $2 trillion, with about $4 billion changing hands every day. That’s still tiny compared to the estimated $7.5 trillion traded daily in more familiar fiat currencies, but it’s growing fast.
In some ways, the industry still feels like the earliest days of the Internet, when mosaic browsers took ages to load and you kept a list of favorite websites on a notepad. Or maybe it’s more like the earliest brick mobile phones made famous by Gordon Gekko. But without going into the gory details, close your eyes and imagine that these technologies actually deliver more or less as promised, allowing the easy movement of value that is as simple, secure and reliable as sending an email.
In some visions, this also conjures a libertarian paradise without meddling governments or greedy intermediaries. More likely, the industry won’t evolve without lots of government oversight to protect against scams, collect taxes and enforce sanctions. There will likely still be plenty of room for banks if only to protect the transmission of monetary policy. Brokers and exchanges will have roles, too, although their services should be cheaper and more transparent.
For now, it will also be a world in which dollars, euros and renminbi will flow alongside Ethereum, Solana and Algorand. (For all the attention it gets, Bitcoin still looks too clunky and unwieldy to actually ‘flow,’ but we’ll see.) The early winners are the so-called “stablecoins” that offer the speed and efficiency of crypto, but remain backed by the dollar.
But anything that so fundamentally reimagines the relationship around money between citizens and their government is bound to drive political change as well. It’s not just the fierce resistance of entrenched interests against innovation, it’s likely to be a much more complex scramble to shape an industry that can move value with a better mix of cost, security and convenience.
For example, clients, innovators and policymakers will determine what crypto alternatives might offer the ease of sending money as a text message without the expensive intermediation of correspondent banks. Which one can best protect against online scams? Which can track criminals or enforce sanctions without requiring honest folk to fax notarized documents full of personal data halfway around the world?
The blockchain code that undergirds cryptocurrencies also offers a promise of distributed governance for these mechanisms. “This provides assurances to those who depend on the network that the rules will change only when it’s in the community’s interest,” writes tech investor Chris Dixon in his provocative new book, Read, Write, Own: Building the Next Era of the Internet. It's a vision that triggers college memories of fierce philosophical debates from John Locke to Karl Marx on how property rights determine the distribution of political power.
And if cryptocurrencies drive new thinking about shifting influence within countries, they will surely drive geopolitical change among countries, too. Maybe money will cross borders more easily and seek out the most attractive combination of economic and political values. A digital euro, for example, may draw inflows if it offers special privacy protection. Meanwhile, China’s digital yuan may be less attractive if its distinguishing feature is to provide the government with enhanced political control.
If the dollar loses its status as a global reserve currency, it won’t be from competition with Europe or China. Rather, it will stem from a failure to keep the U.S. currency as an attractive alternative compared to these rapidly emerging crypto alternatives. This makes it all the more important for Washington to build a receptive regulatory environment for crypto and blockchain innovation even as it launches efforts to design its own digital currency.
Ask any Roman. Great powers that resist modernization will inevitably see their currency turn into a collector’s item.