De-dollarization or Re-Dollarization? The Fate of the Dollar in the Internet Age

The U.S. dollar, or greenback, is a ubiquitous, nearly universally accepted global currency. Like
the country that backs it, the dollar is endowed with special superpowers that are equal
measure historical flukes, as they are a byproduct of steady hands, institutional trust, network
effects and, the quiet part, military might. Just as the U.S. mainland is protected by two oceans,
the U.S. dollar is buttressed by both natural and historical advantages. The natural ones are
courtesy of the post-war decoupling from the gold standard to the establishment of the Bretton
Woods system, which pegged international trade and commerce to the dollar. Whereas the
historical advantages are the accrued network effects, liquidity and underlying payment activity
and their corresponding global networks, which are nearly all dollar denominated or dollar
dominated. But will this dominance last as countries, central banks, currency and economic
unions all aim to wean themselves off of dollar hegemony and the real or perceived yoke of soft
economic power? Will the U.S. dollar survive a trend of concerted de-dollarization and the
emergence of alternative global payment networks that are dollar-resistant and, critically,
sanctions-resistant by design? Will the dollar remain the most relevant currency on the internet,
giving the U.S. digital thrift for the fifth domain of geostrategic interest, namely cyberspace?

When people speak of weaponizing a currency, it is mistaken to assume a currency can be used
as a weapon beyond merely being a pecuniary “dumb bomb.” Rather, the currency, in military
and economic parlance, is merely the payload. The real weapon, however, is the underlying
rails on which currencies and corresponding payment and economic activity are transmitted.
The countries, companies and consortia that control those rails ultimately wield real power and
thus you weaponize payment rails, more so than you weaponize currencies. Herein, the soft
power of dollar hegemony, or the accrued natural advantages to U.S. foreign policy from 80
years of the dollar being the world’s reserve currency, come to light. Approximately 60% of
world trade and cross-border commerce is priced in dollars, while 90% of foreign exchange
trading involves the dollar. The global banking system and the depth of liquidity in capital
markets are predominantly dollar based. The corresponding global dollar supply chain, whether
in physical cash, electronic money or payment messaging instructions on SWIFT, wire networks,
global credit card networks and, increasingly, natively on the internet in the form of digital
currencies, are nearly all dollar denominated or dollar priced. Should this dollar dominance
engender hubris or humility in the halls of economic power in Washington, D.C. and in the
capital of the capital markets, Wall Street?

Would any of these competitive advantages have accrued to the U.S. and, indirectly, to the
global economy, without the encouragement of a free market model that made the dollar the
currency of reference for banking and payments innovations? For example, SWIFT, an acronym
for the Society for Worldwide Interbank Financial Telecommunications, and networks like ACH,
also an acronym for Automated Clearing House, are examples of dollar clearance and
settlement networks. But, without these networks, would the dollar's global reach and
strategically advantageous network effects exist? Indeed, in geoeconomic circles there are
growing calls for upgrading these systems, including SWIFT.

Arguably, successful currencies, whether in a domestic monetary environment or a regional or
global one, are in effect trust and network effect driven propositions. A refrain in the payments
world captures the importance of network effects, in which the payment a receiver is willing to
accept dictates the currency of a transaction. Virtually the entire world is willing to accept the
U.S. dollar, even in places where governments make attempts to ban it or put in place porous
capital and foreign exchange controls. The economic definition of a currency is equal parts a
unit of measure, store of value and a medium of exchange. However, if currencies remain
unevolved from their physical paper-based or metal-based numismatic forms, their extensibility,
reach and therefore utility in an increasingly technologically dependent age would be limited.
Physical money can only be extended as far as your arm can reach - and while this is the
ultimate form of privacy-preserving, sanction-resistant money, it is of little value to always-on
global commerce, trade and internet-borne economic activity.

Thus, the form factor and underlying trust ingredients of sovereign money remain the same,
however, the breakthrough innovation in the underlying rails and money movement networks is
where real economic power (and its projection) lie. For example, look at the efficacy of
non-military sanctions against Russia for its unprovoked war in Ukraine? It is not the dollar or
euro themselves that give economic sanctions teeth, it is the responsiveness to those economic
sanctions from the underlying payment networks, banks, non-banks and other institutions to
shut off the valve of economic activity. The weaponization of payment rails and networks is one
of the primary drivers of de-dollarization trends around the world as countries fear the prospect
of economic hypoxia if the U.S. and its allies shut off payment valves. The thrust of alternative
payment network innovations is accelerating around the world. This includes the rise of central
bank digital currency experiments (CBDCs), the largest of which has been carried out by the
People’s Bank of China with the e-CNY, which is equally motivated by checking the dominance
of domestic fintech giants, as it is about creating parallel global payment networks.

While some have dollar hubris in the face of these developments, others such as former U.S.
Secretary of the Treasury Hank Paulson observed how the U.S. would not lose the so-called
digital currency space race because of the strength, stability and independence of U.S.
institutions. What this view ignores, however, is how the cycle of change, development and
technological transformation with alternative payment system innovations (and efforts to lift the
yoke of dollar dependency) are gaining momentum, adoption and their own network effects.
These developments are running in decade-long cycles, rather than in the short term electoral
or quarterly earnings cycles that define the horizon of U.S. national interest, industrial policy and
markets. For example the U.S. is late to the domestic fast payments field with FedNow, the
Federal Reserve’s fast payment system expected to come online later this year, but years
behind schedule.

Critically, rather than being received as a potential national advantage creating domestic
payment system optionality, FedNow is vigorously debated and often conspiratorially
opposed by a number of entrenched interests that view it as a backdoor CBDC at worst, or, at
best, government encroachment on private sector payment networks. The FedNow-CBDC
conspiracy inspired an official response from the Federal Reserve declaring that FedNow would
not compete with cash nor become a U.S. CBDC, which requires Congressional authorization
and faces stiff opposition. Part of the “anti-everything” opposition to banking and payments
innovations is that entrenched, permissioned payment networks and the regulators who regulate
them are loath to enable challenger innovations and technologies into the formal economy.
Meanwhile, some of these so-called challengers, especially in the crypto-asset economy, have
had a checkered scorecard in their maiden decade, costing more than $2 trillion in market value
last year alone. A mysterious and often suspect cast of characters, from Terra-Luna’s Do Kwon
to FTX’s Sam Bankman-Fried, seem hellbent on mortgaging the promise of open-source,
constantly upgradable financial technologies, which can power a Cambrian explosion in
future-proof dollar-based innovations, for get rich quick financial alchemy or outright fraud. Yet,
for policymakers to ignore the promise of new tools, technologies and arrangements for
processing internet-scale device-centric dollar settlement, would be tantamount to giving up
computer processing because of the bad experiences of the dark web or the “world wide wait”
phase of the internet.

To understand the future of money and payments, and therefore the likelihood the U.S. dollar
remains the global currency of reference in the next century and in its next frontier, the internet,
the past is prologue. As a network effect business, money needs to be natively enshrined on
the ultimate technological network, the internet. How this is done and what form factor
internet-native dollars take, whether payment stablecoins, CBDCs or bank-issued deposit
tokens, matters less than that it is done. The currencies that dominate this frontier, may very
well be the currencies that dominate the global economy. For now, the digital currency gold
standard remains the dollar, even if it occasionally takes the form of crypto-counterfeits or
stable-in-name-only coins.

Dante Disparte is the Chief Strategy Officer and Head of Global Policy for Circle, a leading
financial technology firm and the issuer of the dollar digital currency USDC. USDC has
supported more than $10 trillion in cumulative transactions on the internet and a global
payment network in more than 190 countries. Dante is a life member of the Council on
Foreign Relations, a member of the Bretton Woods Committee, and sits on the World
Economic Forum’s Digital Currency Governance Consortium and Digital Payments Advisory
Committee.