Where Does Crypto and Policy Geopolitics Merge?

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In a pair of recent writings, political scientist Ian Bremmer argues that Big Tech firms will transform the global order, while FP columnist Stephen Walt counters that states will stay dominant. We adopt a third position: technology is not only transforming the global order, but it is also changing the character of businesses and nations. The twenty-first century does not belong to China or the United States, nor to established IT businesses. It is the property of the internet and Crypto is more and more a store of wealth.

This is true for a variety of reasons, the most notable of which being the growth of decentralized protocols such as Crypto (Bitcoin and Ethereum), which are not controlled by either nations or corporations. To Bremmer’s credit, he mentions them, yet he still underestimates their significance. Many of the weaknesses discussed by both he and Walt—that global technology firms are typically domiciled in the United States or China, that they rely on those jurisdictions for contract enforcement, that they lack a state’s political legitimacy, and that their exercise of power has already resulted in a global backlash—are addressed by the introduction of crypto protocols, which can safeguard property and execute contracts beyond the boundaries of traditional nations.

However, technology’s threat to conventional geopolitics extends beyond crypto protocols, tech firms, and even digital space itself, as it has begun to reshape the real world. New kinds of digital money might become geostrategic vectors. This is due to the fact that overseas payments are a crucial use case for both central bank digital currencies (CBDCs) and private cryptocurrencies. Increasingly lower transaction costs, effective and rapid settlement, and traceability, if properly regulated, are only a few of the traits that contribute to their globalization.

The G7 governments are well aware of the benefits of digital financial technology, but they are also deeply concerned about the public policy and geopolitical risks posed by this potentially disruptive innovation, particularly so-called “global stablecoins” (GSCs) operated by loosely regulated, non-financial technology behemoths but denominated in national currencies. These nations have recognized the necessity for international collaboration on how to manage private digital currencies, not least because the alternative – a worldwide free-for-all – might be chaotic and harmful.

They also see that well-regulated digital currencies (crypto) can provide significant public benefits in terms of increased efficiency and lower costs for both domestic and, particularly, international payment systems, as well as help ensure financial services reach the hundreds of millions of people – particularly in developing countries – who do not have bank accounts.

What impact will digital currencies have on geopolitics?

The growth of large technology businesses into global finance is still in its early stages. However, as these behemoths grow and institutions expand their digital footprints, financial technology will transform not just the commercial but also the geopolitical world. Former UK national security adviser Sir Mark Lyall Grant recently warned of the Chinese financial threat posed by a digital RMB, writing that the introduction of a “digital yuan” would give China the “ability to bypass the world’s traditional banking systems and then challenge the dollar’s preeminent position.”

In 2019, former Bank of England governor Mark Carney warned of the international monetary system’s ‘destabilizing imbalance,’ bemoaning the dollar’s ‘domineering dominance,’ and hinting that an active conversation about the possible impact of digital currencies (CRYPTO) on global politics is well underway. The Mackinder school of thought’s traditional geopolitics is concerned with the perpetual position of territorial powers. Russia and Japan’s beliefs may change throughout time, but their geography remains consistent.

The internet, on the other hand, is bringing a new dimension to this. It is not only a passive data layer that states enable and contest, but a new type of geography with the same scale as the actual world. Consider it a digital Atlantis—a new continent floating in cyberspace where old powers contend and new powers emerge. Within this cloud continent, the unit of distance between two individuals is the degrees of separation in their social networks rather than the travel time between their spots on the world.

This implies that anyone may become close to anyone else by just following them on social media, or keep others away by disabling their accounts on the same platforms—no plane ticket required. Any floating creature inside this cloud continent can also seek to connect with any other by pinging the appropriate IP addresses, for anything from purchases to cyber invasions—no prior closeness is necessary.

Every citizen of the old world, as long as they have internet connection, may easily become a citizen of the new by telecommuting via their screens to spend a few hours each day in the cloud, as billions of people already do—no physical immigration necessary. Encryption acts as the cloud’s digital analogue of physical fortifications, allowing any user to defend their digital property without resorting to traditional munitions—no physical force is necessary.

Bottom line: Network closeness has surpassed physical geography, as have fundamental geopolitical notions about citizenship, migration, and power projection. The use of force need to be rethought for the digital world.

Bitcoin Cannot Ignore Geopolitics

We live in a contradictory period, and nothing represents those conflicts more than cryptocurrencies. The much-touted blockchain technology is used in this future approach for anonymous virtual payments via the internet. In summary, each crypto currency employs a publicly available database that logs every trade activity in its network using code that is nearly hard to forge.

This is designed to establish an implicit trust financial system, but the inadequately regulated internet exchanges that allow these deals are routinely hacked. Many coins’ values have soared and plummeted by 50 percent to 100 percent many times in the last year. Scarcity is incorporated into the Bitcoin algorithm, which is approaching its built-in limit of 21 million coins.

It is one among the causes for this leading crypto’s high speculative demand. However, the growth has flooded the market with almost 8,000 new crypto. Even if those that exist simply to scam unsuspecting beginner investors are excluded, it is likely that very few of them will ever develop considerable value or see widespread use in the face of such competition.

In their online advertising, crypto supporters use a techno-utopian tone, imagining a future in which crypto avoids both the manipulations of central banks and national budgets, as well as the power of the police over personal assets, so “taking the politics out of money.” They raise the libertarian question of whether national governments will be required to guide, or even control, private sector finance in the future.

New Players

Former Secretary of State Hillary Clinton gave a strong warning about the emergence of crypto on November 2019 during a panel titled “Great Power Competition: The Emerging World Order.” “Nation states will start paying more attention to… the emergence of crypto, because [it] has the potential for undermining currencies, undermining the function of the dollar as the reserve currency, destabilizing nations — possibly starting with little ones, but becoming much larger,” she warned. She went on to explain that “it looks like China is going to prohibit foreign technology payment systems, such as crypto development, from playing a large role within China because… they’ve recognized… that this might be a direct danger to sovereignty.”

Hillary Clinton’s remarks highlight the strategic significance that cryptocurrencies, particularly bitcoin, are gaining on the world arena. Bitcoin’s challenge to sovereignty, national currencies, and the US dollar’s standing as the world’s reserve currency has the potential to change global power relations. Those countries that can absorb and adapt bitcoin through rational legal frameworks will have an edge over those that are unable to compromise due to their centralized systems. As a result, the United States may host publicly traded firms with bitcoin holdings, bitcoin ETFs, and a substantial portion of the sector, but China has forced to resort to a ban.

Consider what happened to newspapers: They all started by going online. Then Google News indexed all of them. Finally, local newspapers discovered that their geographic monopolies were vanished, as it was no longer required to send physical newspapers via truck.

National currencies will suffer a similar destiny. National currencies already compete with cryptocurrencies because individuals and institutions maintain digital wallets containing a variety of assets that may be exchanged against one another. This trend will only accelerate if central bank digital currencies (CBDCs) are implemented. Every asset, including CBDCs, will be traded against every other asset in a massive table known as the “defi matrix” (defi is short for decentralized finance).

We are going to enter a period of global monetary rivalry in which national currencies must earn a position in someone’s pocket portfolio every hour of every day, even among inhabitants of their own countries. The digital counterpart of the Japanese yen will face up against the Swiss franc, the Brazilian real, and any other asset with an open capital account, including Bitcoin. Everyone, all the time, becomes a foreign-exchange dealer, and only the greatest national currencies—or cryptocurrencies—are ever held by anybody.

Rather than the existing atmosphere of unfettered inflation and competitive devaluation, the defi matrix puts a new sort of discipline on national currencies by allowing billions of people to choose which currencies to retain—or not hold.

New Game, New Rival, and New Systems

The US dollar attained this status in the wake of World War ii —, when it was still backed by gold. The ability to exchange dollars for gold is what led the international community to see gold as the world’s sound money and a store of value. Despite quitting the gold standard in 1971, no competitor national currency has been able to dethrone the US dollar. Since then, most, if not all, governments have been debasing their currencies in the same way, and no credible sound-money alternative has arisen. Bitcoin, on the other hand, has finally presented an alternative as a store of value due to its unchangeable supply and rising user base.

Bitcoin, as a store of wealth, will become increasingly appealing to a larger populace in the current setting of uncontrollable global inflation. It will also appeal to nations seeking independence from the dollar and its destructive monetary and fiscal policies of the US government. They will increasingly feel burdened by the weight of US monetary excesses and will seek to the only feasible alternative. In this regard, El Salvador may just be the canary in the coal mine, with other countries shortly to follow. If enough individuals and nations accept bitcoin as a store of value, the dollar’s role as the world’s reserve currency will be terminated. This, in turn, would have massive geopolitical ramifications. It might be replaced by a rival, or no one would need to take on the role of custodian of the world’s reserve currency.

Earlier this year, Peter Thiel described bitcoin as a “financial weapon” employed by China against the United States. Despite the fact that bitcoin is decentralized, there remained a risk for a long time that China would dominate the bitcoin network, with geopolitical consequences. In its ambitions to become the world’s dominating force, dethroning the US dollar as the world’s reserve currency makes sense. In order to achieve this goal, China has already cut its purchases of US Treasury notes, boosted its gold holdings, and create the Belt and Road Initiative.

Maintaining and capitalizing on its dominating position in the bitcoin network might have aided China’s geopolitical goals. As a first stage, it may have promoted widespread adoption of crypto among individuals and governments. On a sovereign level, this may have targeted countries seeking to wean themselves from reliance on the United States and US-controlled international financial institutions as well as those who are in financial difficulty. China may have then persuaded other, larger countries to join. This may have been accomplished through diplomacy or by creating economic crises followed by demonstrations and upheavals.

Whatever the cause, the bitcoin prohibition may turn out to be a historic disaster. China sacrificed a critical tool in its quest for global supremacy in an act of geostrategic self-harm. With China out of the picture, bitcoin mining has spread to a broader range of countries, further decentralizing the network. This will not eliminate bitcoin from the geopolitical arena, but rather allow it to completely reshape it.

A multipolar or nonpolar global economic system might emerge if no country dominates the bitcoin hash rate and bitcoin is universally acknowledged as the global store of value. No government or institution in this system would be able to impose its will by weaponizing this form of economic value. This new equal playing field would eliminate one of the world’s power mismatches, perhaps promoting diplomacy and compromise in international issues.

Beyond that, crypto, by default, supports decentralized liberal democracies at the expense of authoritarian regimes. Liberal democracies are capable of adopting decentralized systems such as bitcoin on a systemic level. Centralized, authoritarian governments, on the other hand, are opposed to unhindered decentralization because it undermines their hold on power. This is why, under authoritarian governments, the press, internet, and social media are extensively regulated.

Furthermore, by creating a viable alternative monetary system, crypto restricts a government’s capacity to utilize the state’s financial well-being to pursue policy objectives that are not in the best interests of the community. This is especially important for authoritarian governments that are prone to causing hyperinflationary circumstances by printing money to fuel excessive spending, corruption, and wars at the expense of their people’s purchasing power.

Are we going for currency cooperation or currency conflict?

The widespread use of digital currencies has the potential to completely change the global financial system. In January 2020, a group of advanced-economy central banks from Canada, the United Kingdom, Japan, Sweden, Switzerland, and the European Central Bank — announced a collaboration on central bank digital currencies under the aegis of the Bank for International Settlements (BIS).

The Federal Reserve Board of the United States has now joined, although China, despite beginning trials of a local digital RMB, does not appear to be a member of the organization. The coming geopolitical danger from China is certainly a motivator for others to collaborate. crypto has grown into a geopolitical phenomenon. It may jeopardize the US dollar’s function as the world’s reserve currency and, as a result, as an internationally acknowledged store of value.

Combined with China’s recent prohibition, the network’s enhanced decentralization and worldwide dispersion make it less likely to be exploited by any single government. This might minimize geopolitical tensions by putting nations on an equal financial footing, encouraging dialogue and compromise. These shifts may have already occurred by the time politicians become aware of crypto’s geopolitical consequences.

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