The rise of digital currency


Since 1971, when Richard Nixon severed the last link between the dollar and gold, the world has been in a fiat money system (meaning that the money supply is not tied to any scarce reserve asset such as gold. ). Due to the size of the US economy and its dominance in financial and commodity markets, the US dollar has remained the number one currency. The financial crisis has not changed anything.

Confident in the dollar’s dominance for the rest of history, US policymakers have grown accustomed to exploiting it as a lever for foreign policy. The fact that financial sanctions were a very powerful tool was not really appreciated until after September 11, when US Treasury officials began to hunt down Al Qaeda’s financial supporters. People tend to focus on the apparent failure of military interventions in Afghanistan and Iraq. But asserting America’s financial strength after 9/11 has been much more effective and less costly.

Soon the United States also used financial sanctions against other enemies – notably Russia, Venezuela and Iran – and even against friends (Switzerland for example) suspected of protecting tax evaders or other types. criminals, not to mention the allies who wanted to trade with Iran. This power has become more and more awkward for other major economies.

Until recently, there didn’t seem to be any real alternative to the dollar. Indeed, the global appetite for dollars and dollar-denominated securities has tended to grow even faster than their supply, resulting in a strong dollar and historically very low interest rates (with rising bond prices American). As Mark Carney, the Governor of the Bank of England, said at this year’s Federal Reserve conference in Jackson Hole, Wyo., It is not a satisfactory system. President Trump also finds this unsatisfactory but for different reasons: he would simply like to see a weaker dollar (to make US exports more competitive and foreign imports less) but finds that he cannot do it unilaterally.

The advent of various types of digital currency is creating a new state of affairs. Since the launch of Bitcoin, the world has seen a wave of monetary innovation. Cryptocurrencies have proliferated. Many of them, it is true, have been mere experiments. Some have been downright frauds. And maybe it will turn out that blockchain as a technology has more appropriate uses than money. But those who wrote off digital money will soon look as dumb as those who said the internet will never replace the fax machine.

The proof in China, where the digital payment systems set up by Alibaba (Alipay) and Tencent (WeChat pay) have experienced explosive growth. Phase 2 of this story is the overseas expansion of Chinese fintech. One emerging market at a time, China is building a global payments infrastructure. At present, the various systems are separate national versions of the Chinese original. But there is no technical reason why these systems should not be connected internationally at some point. This is because Alipay is already being used for cross-border remittances.

If the United States is stupid, it will just let this process continue until one day the Chinese connect their various digital platforms into one global system. It will be D-Day: the day the dollar dies as the world’s largest currency, and the day the United States loses its superpower on financial sanctions, not to mention its ability to finance trillion-dollar deficits. at less than 2% interest.

If the United States is smart, it will wake up and start competing for dominance in digital payments. The shortest shortcut to a system rivaling Alibaba and Tencent is called Libra, the digital currency offered by Facebook, which, with its 2.4 billion active users, is uniquely positioned to create something Chinese-wide. and quickly. It wouldn’t be a real blockchain cryptocurrency, but rather a Chinese-style digital currency.

There are many obvious arguments against letting Facebook do this, including its highly questionable record in collecting and exploiting user data. However, something like this has to happen, with government sponsorship and regulatory oversight.

Right now, the US Treasury is opposed to Libra and the Federal Reserve seems skeptical. Last week, the French finance ministry also gave Libra the green light. But these attitudes seem symptomatic of risk aversion which suggests a decline.

History teaches us that power is inseparable from financial power. The country that leads financial innovation is leading in everything: from Renaissance Italy to Imperial Spain, the Dutch Republic, the British Empire and the United States since the 1930s. that financial leadership – just ask poor Mr. Pound, which was once worth $ 4.86 – and you lose your place of global hegemony.

Today’s US-China rivalry (what I call Cold War II) is currently too focused on commerce and telecommunications. Washington must urgently turn to the monetary leadership race, which the United States risks losing.


Niall Ferguson is the senior member of the Milbank family at the Hoover Institution at Stanford University.