Challenging the Hegemony of the US Dollar

The US Dollar can be considered as the “universal currency.” The GDP, GNP, per capita income and other indicators of economic growth of different countries are all measured through the US dollar currency. The medium of trade between countries happens through the dollar, and a nation’s exchange rate and currency’s value too is compared in terms of the dollar. The US dollar being considered the primary reserve currency has solidified the dollar’s position as the ‘universal currency.’ How the USD came to this position, allowing the United States to cement its economic and monetary dominance over many other countries, is due to a range of historical and geopolitical factors. But is this dominance welcomed or resented by other countries ? And is there any monetary medium that is capable of dethroning the US dollar off its status as the “universal currency?”

With WW2 at its twilight, the age of European global dominance neared its end, and the age of American and Soviet dominance commenced. As the Cold War progressed, the US expanded their sphere of influence over much of the world. There were several factors that enabled them to do this. The first factor was the paranoia a lot of nations had towards communism and The USSR, that drove them closer to the American sphere of influence. The US GDP in the 20th century was the largest in the world (and still is to this day). This gave the US significant economic strength which was instrumental in them spearheading the Marshall Aid programme, where the US government with the help of banks lent money into post WW2 West European countries, assisting them in their economic recovery. This left much of Western Europe in debt to the giant economic powerhouse that America is. The USA’s dominance over these countries were further strengthened by the Bretton Woods Agreement in 1944 between the US, Canada, Western Europe, Japan and Australia where these nations agreed to fix their exchange rates in to dollar (which was pegged to gold) with the aim of establishing commercial relations and a collective international currency exchange between the countries. While this agreement lasted only till the 1970s, many more countries had already adopted the dollar as their currency to trade with on a global scale, having fixed their national currency’s exchange rate to the US dollar.

However, the USA’s economic dominance through the dollar has had adverse effects on plenty of nations. African countries are amongst the prime examples of this list. The US dollar’s fluctuations, more so during the periods of recessions, had triggered several consequences for African nations due to facing high exchange rate volatility. This made it even more difficult for African countries to execute trade policies efficiently. Their monetary policy is also impacted because pegging their currencies to the US dollar meant that these nations were no more able to independently respond to an economic crisis in their country, during times like inflation and economic uncertainties that are very common in Africa. The main reason behind this is that these countries relinquished control over their monetary policy, putting their policy making at risk of being restricted by the policies of the dollar. Furthermore, these countries due to their reliance on the dollar for trade will be vulnerable to external economic problems outside Africa. For example, a fluctuation in the value of the USD would impact the export earnings and fiscal stability of African countries. There are also increased transaction costs African countries would have to pay since using the US Dollar for international trade involves additional costs. It was precisely for these problems alongside many others that Libya’s former ruler Muammar Gaddafi’s proposal of establishing a pan-African currency across African countries in place of the US dollar was welcomed by many African states and viewed positively by the African Union. However, with the Arab Spring (a series of Western- backed civil conflicts) that followed, and with the ousting of several African governments that supported this proposal, the goal of establishing a pan-African currency was never acted upon. However, with countries spanning from Africa and Europe all the way to the East being unhappy with the dominance of the dollar due to similar economic limitations they face, the calls for a potential replacement of the dollar become louder. The important question, though, still remains : Which medium can potentially compete with the dominance of the USD ?

On 16 March 2023, the American and German law enforcement agencies colluded to shut down a cryptocurrency service named “ChipMixer”, that had worth $3 billion in transactions, under the name of money laundering. While if this was the primary goal of the agencies is not clear, the USA’s fear of the increase in usage of cryptocurrency services is evidently clear. Cryptocurrency refers to a digital form of payment and transactions that does not require the traditional intermediary bodies like central banks, which the fiat currency system relies on heavily. There are a variety of different currencies within the field of cryptocurrency (Bitcoin, CBDC, Ethereum), and have certain advantages as well as drawbacks to be a potential threat to the hegemony of the US dollar; which arguably is already a threat in the minds of the American government.

Cryptocurrency, for one, does away with the problem of centralised finance. It is built on a decentralised blockchain, and thus is not controlled by authorities such as the government or banks like a centralised system. This for one could lead to greater levels of transparency and a less amount of corruption, as well as protection against arbitrary monetary policies. This would be a great deal in tackling the problem of human biases as well as possible identity thefts since personal information is not revealed. Furthermore, since every transaction is recorded on the ledger by the use of blockchain technology , it makes it almost improbable for these transactions to be tampered with, which makes global financial transactions through a digital platform more secure and transparent in this aspect.

A huge chunk of the global population (est 1.7 billion) are unbanked or have almost no access to banking services. As a result of this, many people are unable to receive a loan from banks, while many SMEs struggle to get LoCs (letter of credit) for exports which can put a country’s trade activity at risk. Cryptocurrency can extend financial services to these unbanked populations and SMEs. In DeFi platforms (which is done using ethereum), people can easily access loans immediately, while those who lend amounts receive rewards in minutes. This makes it possible for individuals and companies to participate in trade and transactions in the global economy without requiring the intermediaries and authorities like central banks. In addition to that, since decentralised finance takes place digitally, transactions can happen at a far quicker rate and at a global scale at the same time, making it more efficient in comparison to traditional banking.

However, the entrance of cryptocurrency and DeFi into the financial world is not without its own flaws. While there are a few security positives that are offered through decentralised finance, one of its most prolific shortcomings also stem from security concerns of its usage. While blockchain technology in itself is highly unlikely to be vulnerable to cyber attacks, this digital platform can be used to manipulate a user into revealing information regarding their private key or digital wallet that can get stolen. Thus, if cross-nation transactions are to be made between major businesses of each country, it would mean not only a security risk to the firm but to a country’s economic activity as well due to the possibility of a huge financial loss to malware or cybercriminals. A major cause behind this security risk lies in the fact that most cryptocurrency and DeFi systems are not backed by the government, which does not give users the right amount of security measures against such malware.

Furthermore, cryptocurrencies are notorious for their price volatility. While the dollar being a dominant currency is a risk because a fluctuation in the USA’s prices will inevitably lead to price fluctuatuons of many other nations’ economies, crypto currencies are unpredictable and experience significant fluctuations over a very short period of time. This level of volatility makes crypto currencies extremely unstable for day-to-day transactions and also as a store of value. Its volatility can also lead to uncertain pricing in goods and services that hamper economic stability.

Finally, a significant reason crypto currency can’t be a sure substitute for the US dollar’s hegemony is due to the fact that a decisive majority of the world do not use crypto currency services. This is hugely due to the fact that most of these services are not government backed (barring very few like the CBDC). Government backing gives the public a sense of faith and security in using a certain service. Since most governments of the world do not recognise crypto currency, the vast majority of the public is apprehensive about using this service. Moreover, since there is not much government backing, crypto currency lacks any regulatory measures, which can create challenges in the long run like fighting fraud prevention, as it will be difficult to obtain back digital money for a user in case of theft. It will also be poorly equipped in combating criminal activities and terrorism financing. Thus, without any regulatory framework, crypto currencies will leave populations exposed to a huge security risk. Lastly, while it can help shield users from biassed monetary control, governments are still required to exercise monetary control and fiscal policies. No centralised control over the money supply would mean that a country would fail to respond to a financial crisis promptly or even manage its economic activity on a collective scale, and thus economic growth could get hampered. Lastly, a negative externality of the use of crypto currencies is that the more it is used, the more cryptocurrency mining is required. This would take a lot of energy consumption, and due to that would result in huge amounts of carbon emissions and growing environmental concerns, which is a major discouraging factor at a time climate change is a globally recognised problem due to its effects on the planet.

To conclude, the US dollar’s power is certainly problematic for plenty of countries when it comes to the freedom to control their economic activity. And like many other forms of currency before like gold and silver, the dollar is bound to be replaced by a more favourable alternative in time, even more so when there is a lot of resentment towards the USA’s economic influence over other nations through this currency. While currencies like the INR, Brazilian Real are seen as potential competitors to the USD’s dominance in certain regions, cryptocurrency, at present looks like the strongest medium that can challenge the dollar’s hegemony on a global scale because it answers a lot of problems posed by the dollar’s power over countries. But the new, digital currency has significant shortcomings of its own that governments have enough reason to get concerned about. However, cryptocurrency as a service is a work in progress. The DeFi movement which uses ethereum has a lot of improvements from the first digital currency : bitcoin, and the crypto currency service may have more prolific, significant modifications and improvements in the near future, which makes crypto currency’s position as potential competitor to the USD’s dominance with time seem all the more realistic and even to an extent, expected.