The Breakdown - Did We Just Enter the Beginnings of the Post-Dollar Hegemony Era?

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, March 6th, and that means it's time for Long Reads Sunday. Today we are discussing whether one of the long-range impacts of these sanctions will be the beginning of the post-dollar world. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it five stars, give it a great rating, or if you want to get deeper into the conversation, come join us over on the Breakers Discord. You can find

Starting point is 00:00:51 a link of the show notes, or you can go to bit.combe, slash breakdown pod. Also, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. And finally, This week, I am pleased to have an additional sponsor in Coinelli. And with tax season upon us, this is one I think you'll want to hear about. Cointelli is here to make crypto tax reporting stress-free for both individuals and accountants. Designed by CPAs, Cointeli supports hundreds of crypto platforms and provides accurate calculations so you don't pay any extra on your taxes. Cointelli also charges no added fees for up to 100,000 transactions and offers 24-7 customer

Starting point is 00:01:31 support from tax advisors. Check them out at cointelli.com. That's coin t-E-L-L-I.com. Thanks to CoinTeli for joining as a sponsor of the breakdown this week. All right, so to today's main discussion and our article that we'll be reading. As anyone who's been following the show will know, what are the main considerations as people have been thinking about the geopolitical implications of these sanctions isn't just whether they'll be effective in bringing Russia to heel with regard to the specific war in Ukraine. It's also about whether it will push not only Russia, but other nations around the world to reduce their dependence on the dollar as the world's reserve currency. The idea here, of course, is that if we can weaponize the U.S. dollar and the U.S.

Starting point is 00:02:19 dollar is the currency the world runs on, does that make people fear what we might do to them later on? Well, for context on this discussion, let's turn to David Morris today, who wrote Bitcoiners were right. Weaponized finance just created a post-dollar planet. A wave of sanctions hitting Russia highlights the complex web of connections that make up contemporary global society and its ultimate fragility. Vladimir Putin's Russia is facing a wave of truly unprecedented financial sanctions in retaliation for its widely scorned invasion of Ukraine. The sanctions have suddenly revealed the massive power that lay dormant in the unified global banking system for decades. but it likely also marks the beginning of that power's end and the dawn of something more fragmented.

Starting point is 00:03:05 Russia's dependence on systems like swift bank messaging, correspondent banking, and Apple Pay is a product of the global dominance of a unified market capitalist status quo. This status quo represents the neoliberal end of history that was widely presumed to have arrived with the fall of the Soviet Union. But there may be no better sign of the end of history than the weaponization of finance happening right now. The scope of sanctions hitting Russia over the last week has showcased the incredible web of nested cross-border interdependencies that make up the fabric of essentially every contemporary society and their ultimate fragility. Some Russian banks have been disconnected from

Starting point is 00:03:42 the swift messaging system crucial to international transfers. Shares in one of Russia's largest banks collapsed 95% on the London Stock Exchange. The ruble has declined by roughly 50% against the dollar in just a week, a body blow to the Russian economy that would have long lasting effects even if it is a short-term dip, which it won't be. Trade restrictions are looking just as devastating. Taiwan has said it will halt semiconductor exports to Russia. Industry observers believe the Russian commercial air fleet made up largely of Boeing and Airbus planes is two to three weeks away from complete shutdown because of an embargo on parts. Apple Pay and other consumer payment services have been cut off for some customers,

Starting point is 00:04:20 reportedly causing disruptions, including slowdowns in Moscow's subway system. The total impact reaches down into the very guts of Russian society. It was seemingly not much of an exaggeration then when France's finance minister promised on Tuesday, March 1st that, quote, we are going to cause the collapse of the Russian economy. All of this should be considered in a longer historical context. Until recently, such opportunities for disruption simply didn't exist. Swift was not created until 1978. As recently as the middle of the 20th century, international banking still regularly involved shipping large amounts of gold around on boats. The most frankly insane element of the sanctions, though, is the freezing of the global foreign

Starting point is 00:04:59 exchange reserves of Russia's central bank. This is possible because, as London School of Economics Visiting Fellow Osmani Mandeng explained to the Financial Times, foreign exchange reserves are not held by central banks, but instead by other banks around the world. Quote, securities and money never move. Everything is external. This is believed to have affected fully half of the reserve holdings of Russia's central bank, which recently totaled more than $630 billion. These sizable reserves, according to national public radio, were part of a long-term plan to make Russia sanction-proof. This strongly suggests that Putin has made a massive geopolitical miscalculation about the nature

Starting point is 00:05:38 of the global financial system. Russia has behaved as if trusted European and American central banks would continue honoring its reserves even after an invasion of Ukraine. This would have allowed Russia to continue propping up the value of the rubble, among other things, for months, even in the face of sanctions. Russia has refused to recognize the sovereignty and property rights of Ukraine, so it has few legs to stand on while complaining about having its lunch money stolen. But these sanctions will also permanently undermine the widespread assumption

Starting point is 00:06:05 that global banking is a merely neutral and rules-based system. Adam 2's writing in chart book argues that, to do this reserves freeze to a fellow central bank, involves breaking the assumption of sovereign equality and the common interest in upholding the rights to property. As Matt Levine points out with predictable brilliance at Bloomberg, the sanctions have driven home that the global banking system, like most monetary systems, amounts to, quote, a way to keep track of what society thinks you deserve.

Starting point is 00:06:31 This is an excellent way to think about the yen for hard money that motivates many Bitcoiners. While there are ways for nation-states to restrict the movement of Bitcoin, such as enjoining its sales via exchanges, Bitcoin stored in an on-chain wallet cannot be seized or frozen by the kind of decrees that have cut Russia off at its knees. Bitcoin can be described as a digital bearer instrument and can be moved, bought, and held without third parties or intermediaries outside of its own network. This gives new resonance to characterizations of Bitcoin as digital gold. Gold has always been a particularly useful instrument during wartime and other disruptions, because its value is considered inherent to the object. Gold rose nearly 10% in February amid rumors of war.

Starting point is 00:07:13 Bitcoin is far more mobile than gold, but also has a very important. as some disadvantages. In particular, gold has no memory, while the transaction history of each Bitcoin is preserved on the blockchain. That presents real potential problems for the trade in formerly dirty coins, which could wind up blacklisted by mainstream exchanges, even after they're no longer owned by a global pariah. Still, what we're seeing is a significant vindication of the underlying skepticism of traditional banking that drives many in crypto, and particularly those committed to Bitcoin specifically. It is arguably the exclamation point after years of smaller examples of financial sanctions against groups ranging from sex workers to Canadian truckers.

Starting point is 00:07:50 That doesn't mean Bitcoiners are dancing in the streets, though, anymore that someone warning about the U.S. infrastructure deficit should celebrate when a bridge collapses. While Bitcoin is a useful object lesson and model for what a neutral global payment system could look like, it is unlikely that the near future will see huge states using Bitcoin or other cryptocurrencies to depart the banking status quo. Instead, there is considerable speculation among finance professionals that Russia could begin conducting trade using China's RMB and banking infrastructure. Though the dollar is currently surging as a safe haven, a Russian move to R&B, could significantly accelerate the ongoing decline of the dollar's global dominance. That would be a major

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Starting point is 00:10:49 The whole idea here is that if the U.S. dollar system is effectively neutral, we can ignore the fact that those parties who are not the U.S. can ignore the fact that it is, by definition, not neutral because it is tied to a specific political entity. In other words, the United States. For many, many years, this neutrality was a key part of this global system. There is, of course, another aspect to neutrality, which is not just that the users of a system, don't feel threatened, but also that it allows for more users of a system in a network. Swift, as has been pointed out, ultimately runs on a network effect where it wants all of the banks in the world to be on the same system. It is much less useful and much less efficient if the world is divided into 17 or 18 different swifts based on region and politics and religion and whatever else you might divide a banking system around. That creates another motivation for political neutrality, at least as applied in practice. There have been, however, cracks in the political neutrality of the financial system over the last decade.

Starting point is 00:11:56 The disconnecting of Iran from the SWIF system stands out as chief among them. Going into this week, however, it was unthinkable to many that the U.S. and its allies would go so far as to target a state the size of Russia with this sort of financial weaponization. Then again, it was also largely unimaginable that a state the size of Russia would choose to invade its neighbor unprovoked. But here we are. Given this and given the new world in which the U.S. and its allies have chosen to weaponize the financial system in this way, it creates a crack in the narrative of political neutrality of the U.S. dollar-led system. In fact, for some, it creates much more than a crack. It creates clear and present evidence that this is now a tool that can and, in fact, will be used in circumstances that the U.S. and its allies deem fit.

Starting point is 00:12:46 Now, one counterpoint might be that if you're a counterpoint that if you're, not a bad guy you don't have anything to worry about, right? The classic privacy argument, for example. However, you have to think that even some U.S. allies might look at this situation and be somewhat concerned about their reliance on the system. Europe is a complex collection of different ideas and sentiments and political philosophies. And what happens if the U.S. decides that something that someone else in Europe is doing disqualifies them from participation in this global system. A lot of the arguments that this is the beginning of the end of the dollar system rest on this simple logic. That just by taking this action, we've irreversibly created an incentive

Starting point is 00:13:29 and a motivation for people to move away from the U.S. system. Now, the counterpoint that many have is basically where the hell are you going to go? Are you really going to turn to a Russian-led consortium as an alternative for a settlement currency around the world? Are you really going to turn to China? Do you think China has more of your interests in mind as it tries to roll out its alternative systems? Personally, I don't think that the cleanest dirty shirt argument is that dismissable. I also don't think it's mutually exclusive to say that the U.S. has gone and created more incentives for people to look for an alternative without it being clear that there is a good alternative currently. The other counterpoint to all of this is really how much has changed.

Starting point is 00:14:10 when it comes to this discussion of a unipolar or multipolar world, how much have the actions of the U.S. and its allies this week pushed, for example, China farther versus just nudged it along a path that it was already on. We've watched China spend the last two years systematically trying to remove any domestic threats to its monetary system, first in the form of mobile money from Web2 companies and then second in the form of Bitcoin and crypto.

Starting point is 00:14:37 It's been very clearly a goal for the CCP to experience, banned China's currency as a settlement currency for trade around the world, and it seemed pretty clear that a big part of their push for a digital yuan is exactly that. In other words, it's not impossible that this is just confirming for China of why they wanted to get outside of the U.S. sphere of influence versus something that actually fundamentally changes their position. If that's the case, then the real question will come down to spheres of influence. Where will emerging markets look to alignment if you have a multipolar world with a Chinese currency-led system and a U.S. dollar-led system competing for your affiliation? Or will you, and this is where

Starting point is 00:15:16 El Salvador gets really, really interesting, look to an alternative settlement currency that is, in fact, non-sovereign and not subject to either of these political games? You want to talk about big-picture power shifts. This is about as big as it gets. For now, I want to say thanks again to my sponsors, nexo.io, Arculus, FTX, and Coyntelli. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Did We Just Enter the Beginnings of the Post-Dollar Hegemony Era?

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