Pariah states seek to unseat the mighty dollar with crypto

The fundamental nature of money is changing: only a few years ago, the nexus between geopolitical risk and cryptocurrency was virtually non-existent. Today, their intersection is central to long-term global economic order. Before delving into how that relationship is playing out, some basics: A cryptocurrency – like bitcoin – is a type of digital currency based on a network of independent computer nodes that confirm transactions through decentralized consensus. Put simply, Blockchain is the underlying technology of bitcoin. Oil and uranium have long been considered geopolitical tools of influence – similarly, national cryptocurrencies and blockchain will be employed to create and sustain influence in the global financial system. That reality has shaped an ongoing arms race to the next global reserve currency. It’s one thing having profit-driven tech giants like Google, Amazon, IBM and Microsoft invest in blockchain for innovation; but it’s an entirely different matter when states go into blockchain technologies with various – often conflicting – national priorities. This begs the following question: So what? What would the rise of an encrypted digital currency mean for world order? Why is there a fierce competition for digital currency supremacy? These are the questions animate my take, and more importantly, the future of geopolitical great-power competition.

The rise of an encrypted digital currency has significant security implications, particularly as they pertain to the US. The global financial system is one that is dollar-led – the US dollar (USD) is the world’s reserve currency, granting the US unique supremacy and influence over the global financial system. This leverage means that the US can a) effectively employ economic sanctions to maintain geopolitical stability by cutting off adversaries’ access to dollars and, b) global trade must run through US banks. The US’s ability to leverage economic sanctions as a policy tool is central to geopolitical stability and a rules-based global order. It is therefore no surprise that nation-states impacted by – or at risk of – US sanctions aim to upend Washington’s financial prowess, granting their economies sanction-immunity. How exactly are states attempting to achieve that goal? By developing decentralized payment systems through blockchain technology and cryptocurrencies. A new report from the Foundation for Defense of Democracies (FDD) exposes such efforts by a “crypto-rogue” quartet: Russia, Iran, Venezuela, and China.

Of the four crypto-rogues, China leads the race. Analysts argue that displacing a dollar-led global financial system with a blockchain-based system is nothing less of national priority to policymakers in Beijing. The Digital Currency Research Lab of the People's Bank of China (PBoC) is devoting substantial resources and expertise to digital currency development. However, in the short-to-medium term, China is constrained by its status as the largest holder of US treasury bonds – therefore, strategic caution is imperative.

Crippled by sanctions and public discontent, Iran has been looking for a lifeline. Rather than acting like a rational law-abiding nation where citizens are granted basic services, the Iranian regime has looked into the use of cryptocurrency to evade US sanctions. These efforts include blockchain pilot projects and university-level blockchain tech education. Tehran’s efforts are unlikely to change the dismal reality on the ground where Iranian public discontent has arguably reached a tipping point.

A 2019 United Nations report relays conditions in Venezuela today: stagflation ensues as 94 percent of citizens live in poverty, while chronic hyperinflation persists leading to violence and starvation. Maduro’s administration seems to follow Iranian logic, prioritizing the development of a state-sponsored cryptocurrency – the petro-coin – over internal stability and meaningful accountability. Like Iranian attempts to evade sanctions, Maduro failed miserably.

The Russian impetus to develop blockchain technology is driven by the need to “avoid various limitations in global finance trade,” according to President Vladimir Putin. Moscow has ventured into an effort to develop a regional cryptocurrency with members of the Eurasian Economic Union (EAEU), while running various blockchain pilots.

The competition for digital currency supremacy is likely to persist, generating a host of policy challenges that demand greater attention by US policymakers. In the short-to-medium term, it is unlikely that a blockchain-based value transfer system will displace the dollar-led global financial infrastructure. However, the successful deployment of an alternative financial system by any of the foregoing nations would have a dramatic impact on global security and geopolitical stability. As such, it is imperative that US economic policy is nimble in detecting and responding to paradigm-shifting scenarios. One way the US can strengthen in-house blockchain expertise is through deeper and more meaningful private-public partnerships. These partnerships must actively engage the offices of Google, Twitter, and Facebook to develop proactive mechanisms to improve financial resilience and propel innovation in the blockchain domain.

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Sultan Althari is a Masters Candidate in Middle Eastern Studies at Harvard University’s Center for Middle Eastern Studies and Student-Affiliate at the Kennedy School's Middle East Initiative.