Digital Disruption of the Global Petrodollar, and Potential Renaissance for Local Institutions
Guest editorial by Jon Ungerland, CIO, DaLand CUSO
In mid-March, the Saudis agreed to a framework with the Chinese that would allow the sovereign nation to engage in trade of oil (and other commodities) independent of the U.S. dollar.
In 2019 and 2020, China piloted its Digital Yuan central bank digital currency, effectively ushering in an era of a major geopolitical trade and military power moving beyond the electronic dollar.
Years ago, in my early days of educating financial institutions about cryptocurrency, digital assets, and stable coins, I noticed a predictable pattern when exposing legacy banking mindsets to these crucial modern concepts of money. Somewhere around the two-hour mark in the conversation, after lunch, when the deluge of data inevitably threatened to drown dated mindsets, some senior executive would (literally) begin to pound the table and assert some variation of the following: “The dollar will always be king!”
In 2017, such a blind bias was understandable. In 2018, it was forgivable. In 2019, the mindset was questionable, especially from institutional executives expected to safeguard strategy and organizational soundness. In 2020, such faith was irrational (in the face of the “run the money printers overtime” monetary policy of the Fed). In 2021, this zealous assertion began to resemble a sort of naïve innocence and optimism. As of mid-March 2022, it would seem even the U.S. Treasury, President Biden, and the Federal Reserve are concerned about the eternal supremacy of the electronic U.S. petrodollar. In 2023, I imagine such ignorance will be an exam finding. At least we can hope, for the sake of the community financial services industry.
On March 9, 2022, President Biden signed an executive order effectively instructing and marshalling all pertinent branches of the federal government to develop strategies for protecting U.S. economic, industrial, and security interests in the midst of rapid innovation related to digital assets, cryptocurrency, stable coins, and central bank digital currencies.
Devoted disciples of the dollar had long hoped that the bishops and cardinals (Janet Yellen, Jerome Powell, Gary Gensler, Biden, etc.) of the church of the holy petrodollar would excommunicate cryptocurrency from the sacred realms of banking and finance. Prior to Biden’s executive order, the prevailing dogma was something like, if the U.S. government wants to shut down Bitcoin and cryptocurrency, it can and it will.
Well, as the text of Biden’s executive order makes clear, U.S. agencies won’t be stepping in to save the electronic petrodollar from digital disruption:
“We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets. The United States has an interest in ensuring that it remains at the forefront of responsible development and design of digital assets and the technology that underpins new forms of payments and capital flows in the international financial system, particularly in setting standards that promote: democratic values; the rule of law; privacy; the protection of consumers, investors and businesses; and interoperability with digital platforms, legacy architecture and international payment systems,” the order stated. “The United States derives significant economic and national security benefits from the central role that the United States dollar and United States financial institutions and markets play in the global financial system. Continued United States leadership in the global financial system will sustain United States financial power and promote United States economic interests.”
Rather than futilely attempting to shut down or control global distributed value storage and transaction networks like Bitcoin – purpose-built to resist centralized control or corruption (not to mention more advanced technologies developed now 10 years after Bitcoin) – U.S. Treasury, the Federal Reserve, and White House officials seem to have gotten this one right (at least in part).
While hardly an unequivocal blessing of the budding space of Bitcoin, cryptocurrency, digital assets, and decentralized finance, Biden’s executive order is far from the exorcism the institutionally devout had anticipated. Crypto and digital asset advocates remain concerned the executive order lays the groundwork for overreach into important elements of the emerging space like private stable coins. Privacy and decentralization proponents point out the possibility of this sudden surge in interest on the part of government bureaucracies leading to a reactive and desperate power grab – in the form of a U.S. central bank digital currency (CBDC) – which might wipe out local institutions and eliminate consumer privacy. Those bullish on Bitcoin believe U.S. Treasury and U.S. legislators may be moving toward federal recognition of Bitcoin as legal tender (and point to recent announcements in U.S. states like Arizona, Texas, Colorado, and Florida to bolster their optimism).
Any of these noted scenarios are possible, but it’s also probable that none of them come to fruition. One thing is certain about this new world of digital asset networks and distributed finance tech: The pace of innovation is blistering compared to the legacy tools and tech of centralized banking. Other innovation paths and hybrid approaches are sure to arise. The crucial objective of the moment isn’t to go all in on Bitcoin, Ethereum, Cardano, or Ripple. The critical task of the moment, especially for a financial institution leader, is to mediate on the following mantra: The electronic dollar won’t always be king. A simple study of the fate of imperial currencies across history and around the world should make even the staunchest traditionalist more than slightly concerned. Fiat currencies are designed to do two things: 1) inflate/devalue over time, and 2) eventually die.
The death of the electronic U.S. petrodollar doesn’t need to lead to the demise of local, community, decentralized, democratically governed and accessible financial services. The changing of the global banking guard will undoubtedly represent unprecedented challenges to dollar-based economies. American bankers of the present generation will live through disruption unlike anything seen by strategists and leaders in the past 60 years. Big banks, multi-national corporations, federal agencies, commodities, and consumables are all likely to experience considerable disruption as nations ditch the electronic dollar in favor of more modern digital currencies (like the Yuan CBDC, or other ready-made digital asset networks). Biden’s executive order directly acknowledges the “benefits” afforded the U.S. by the electronic dollar’s status as the global reserve currency. The transition from the era of the electronic petrodollar to the epoch of digital assets and decentralized finance/trade will be painful, especially for the U.S.
This pain, however, doesn’t have to be fatal. It can be productive. No pain, no gain, as athletes, soldiers, and innovators are prone to say. As massive global systems of centralized financial exclusivity and obfuscation implode, your local financial institution has an opportunity to develop a strategy for modern, digital, democratic, and decentralized relevance. That strategy will require knowledge of these new banking technologies, distributed networks, and digital assets. Yet, in these historic moments of the decline of global regimes and currency empires, informed and reformed local institutions can and should position themselves to contribute to an essential renaissance of community commerce and complimentary local, digital, democratically controlled, decentralized means of money storage and movement.