Washington’s weaponisation of the US dollar as a foreign policy tool depends on its pre-eminence as a global reserve currency.
But the emerging threat to this hegemony is e-currencies, and Beijing’s huge head start could put it in control of the world’s financial structure.
The United States Department of Justice last month announced the dismantling of three terrorist financing cyber-enabled networks involving the al-Qassam Brigades, the military wing of the Palestinian Hamas group; al-Qaeda; and Islamic State. The justice department claimed the effort resulted in the biggest seizure of terrorist organisations’ cryptocurrency.
The bust spotlighted the US’ increasing use of financial sanctions and other forms of economic coercion to either neutralise threats or alter a nation’s conduct, as opposed to military means.
Iran is a case in point – the American financial chokehold on Iran has pushed the country into a deep economic recession, and the Trump administration’s “maximum pressure” campaign has made things worse.
The effectiveness of financial sanctions depends on several critical factors. The two most important are the pre-eminence of the US dollar as a global reserve currency, and Washington’s ability to control the flow of payments.
There are several weapons in the financial sanctions arsenal. The three most common are the freezing of bank accounts, seizure of assets, and blocking access to the Society for Worldwide Interbank Financial Telecommunication, commonly known as the Swift system. The US stepped up its use of financial and economic weapons after September 11, but President Donald Trump’s weaponisation of the US dollar as a foreign policy tool has taken this pressure tactic to a new level.
In response to the dollar’s dominance in the global financial system, several countries – including Iran, China and Russia – have begun to explore alternatives to the status quo. But they are not looking to pivot to a sovereign currency issued by a central bank – the emerging threat to the hegemony of the US dollar is the growth and acceptance of digital currencies, as well as the proliferation of blockchain settlement systems. Venezuela, which has been hard hit by US sanctions, in February 2018 tried issuing its own cryptocurrency to circumvent financial pressure from Washington and deal with hyperinflation. The Petro, which was backed by oil reserves, failed miserably – but Caracas’ experience opened up the possibility of a national cryptocurrency.
That same year, Iran announced it would issue a national cryptocurrency to use blockchain technology to develop a new financial infrastructure that was not linked to or affected by US-led sanctions. Soon after announcing its programme, the Central Bank of Iran presented a draft on the legal structure for issuing a cryptocurrency based on the open-source blockchain technology Hyperledger Fabric.
There is some irony here: the Hyperledger Fabric open-source code was intended to provide blockchain traceability and prevent the use of child labour, theft of natural resources, environmental damage and other shady business practices, but is proving a boon for countries intent on beating the system.
Iran has moved quickly. In January last year, it issued regulatory framework “Version 0.0”, which recognised global cryptocurrencies and licensed their trade, but prohibited their use for internal payments. Early this year, Iranian regulators allowed the sale of crypto-mining licences; more than 1,000 licences were issued by the Ministry of Industries, Mine and Trade, and many went to international companies, most notably from Turkey.
In April, the Turkish crypto-mining company iMiner began an ambitious plan to set up 6,000 mining rigs valued at US$7.3 million in Iran’s Semnan Province. Such ventures mean the industry has the potential to add US$8.5 billion to the Middle Eastern nation’s fragile economy.
But while it is unlikely that US dominance will be threatened, the implications of an alternative financial system should not be discounted. A national cryptocurrency could resolve the most vexing problem in international commerce – the requirement for a reserve currency.
Beijing is set on a different path. China already has more than half of the world’s digital mining capacity. While Beijing is aiming to become the world’s leading economy, the yuan is still not openly tradeable and does not pose an immediate threat to the greenback’s dominance. Nevertheless, a Chinese endorsement of some sort of national cryptocurrency payment is going to be a direct challenge to the US. The size of China’s internal market, along with the population’s widespread use of mobile payments and its prominence in global trade, could trigger widespread adoption of a “crypto yuan” China’s central bank in April introduced a digital currency pilot programme limited to four cities: Shenzhen, Suzhou, Chengdu and Xiongan. China’s experience in the cryptocurrency realm could help Iran, especially since the latter is growing increasingly dependent on the Asian giant. However, the two countries’ planned e-currencies are completely different.
China is going to closely monitor its citizens’ spending patterns and deviations from the norm, giving regulators another tool to fight the giant shadow banking industry – worth an estimated US$8.4 trillion – and enabling more stringent state control over the economy.
Iran, on the other hand, plans to use its cryptocurrency merely in the international energy market, avoiding any internal use that could destabilise the fragile status quo.
The US government, which is aware of Iran’s cryptocurrency ambitions, has taken steps in reaction. In December 2018, the “Blocking Iran Illicit Finance Act”, which threatened Iran with additional sanctions if it developed a national cryptocurrency, was introduced in the US Congress. A subsequent bill called for increased sanctions against any entity or person supporting Iran in the development of its national cryptocurrency, or even facilitating its adoption. This could put China in a spot as tensions between Beijing and Washington continue to grow.
But to protect the greenback’s dominance, the US will need to act quickly on a digital dollar. So far, it has faltered in its efforts, and is mired in debate about whether to even allow digital currency.
Much of the attention on the tech war between Washington and Beijing has been focused thus far on Huawei. But the bigger prize is control of the world’s financial structure – and China’s efforts in cryptocurrency have given it a big head start in this area.