OpEd With RR Ft DeFiHustle : De-Dollarization, The Silent Pandemic 😷
A strong revolution is happening as the financial markets face unprecedented friction from countries in the East.
Key Takeaways🍿:
- De-dollarization is a process in which countries reduce their reliance on the US dollar for international trade and investment. 💵
- De-dollarization could lead to higher borrowing costs for the US government, a decline in the value of the US dollar, and slower economic growth.🔺
- The BRICS nations are working to reduce their reliance on the US dollar as the global reserve currency and are exploring the use of cryptocurrencies.🌏
Just this past week, the United States has experienced the most prominent move against the US Dollar in recent history.
Here is a list of some of the bombardments the US faced over that time:
- Iran stated that they are reducing their dependence on the US Dollar for regional and international trade.
- France has said Europe should reduce dependence on the US.
- Russia, Saudi Arabia, and China are now trading with the Chinese Yuan.
- Brazil, Russia, India, China, & South Africa (BRICS) overtook G7 nations in global GDP to become economically more powerful.
- Saudi Arabia entered a trade alliance with China, Russia, India, Pakistan, and four Central Asian nations to avoid further reliance on the US dollar.
- China and France completed their first LNG gas trade using the Chinese Yuan, ending reliance on the US dollar for energy trades.
- Brazil, Russia, India, China, and South Africa (BRICS) are developing a new currency, State Duma Deputy Chairman stated.
- Saudi Arabia partnered with China to build a Chinese oil refinery for 83.7 billion yuan ($12.2 billion).
- President of Kenya told his citizens to get rid of US dollars.
Now, this effort to push and speed up de-dollarization is genuine. I’m here to explain the implications for the macroeconomic environment and how this will affect the cryptocurrency and equities market and us everyday people.
De-dollarization, What does this mean?
De-dollarization is a process in which a country or group of countries reduces their reliance on the US dollar to conduct international trade and investment.
This can involve a shift towards using alternative currencies, such as the Euro or the Chinese yuan, or a move towards using commodities, such as gold or oil, as a means of payment. More recently, cryptocurrencies like BTC gained popularity as many crypto-maxis used digital currency to revolt against the controlling and opportunistic USD.
The term “de-dollarization” gained significant prominence in the aftermath of the global financial crisis of 2008, when many countries became concerned about the instability and unpredictability of the US dollar as a reserve currency.
Since then, several countries, particularly those in emerging markets, have reduced their exposure to the US dollar and increased their use of alternative currencies. If we go further back, many countries began to distance themselves from the US dollar due to the Nixon Shock in 1971. This was a significant event in which US President Richard Nixon ended the convertibility of the US dollar to gold, effectively abandoning the Bretton Woods system of fixed exchange rates that had been in place since the end of World War II.
The shock meant that countries were inevitably forced to peg their currencies to the USD, which is our current system. Just look at the dollar's value compared to if we remained on the gold standard. No wonder countries are fed up.
Now that we’ve established the history behind the de-dollarization motive, what’s the impact such a transition could have?
There would be significant implications for the US economy, as the US dollar’s status as the dominant global reserve currency has helped support the country’s economic growth and stability. If de-dollarization efforts are successful, it will lead to a decline in demand for US dollar-denominated assets, such as US Treasuries and other government bonds.
This could lead to higher borrowing costs for the US government, as investors demand higher yields to compensate for the increased risk of holding US dollar-denominated assets. De-dollarization would also lead to a decline in the value of the US dollar as demand for the currency decreases. This would make imported goods more expensive for US consumers and businesses, leading to inflation and potentially slower economic growth. Now, considering the biggest economy in the world is the United States, stagnating growth would hinder the stock market and, most likely, the crypto market.
Seeing as almost 30% of crypto investment is currently in the United States, this market shock would be unprecedented. The US, being one of the most prominent innovative countries in the world, also suggests that crypto innovation would deteriorate.
Furthermore, if the US dollar loses its status as the dominant global reserve currency, it would shift the balance of power in the global financial system, potentially reducing the US’s influence in international affairs and economic policy.
Now, you may ask yourself why this happened so suddenly in 2023.
Well, it all comes down to Russia. Last year when Russia invaded Ukraine, the US responded to this by sanctioning Russia financially, restricting trade and settlement in USDs. This was essentially the United States shooting themselves in the foot because countries throughout the East saw these sanctions and limitations as the US abusing their power as the global leader and have since ramped up tensions with the US, increasingly making it known that reliance on the USD will slow down.
One of the biggest drivers in this move was the BRICS+ nations.
The BRICS+ Nations
The BRICS nations (Brazil, Russia, India, China, and South Africa) are a group of five emerging economies that have seen significant growth over the past decade. In recent years, they have been working to reduce their reliance on the US dollar as the global reserve currency. The rise of cryptocurrencies, which operate outside of traditional financial systems, presents an exciting link to de-dollarization efforts by the BRICS nations.
Over the years, the BRICS nations have taken steps to create their digital reserve currency backed by physical commodities such as gold, oil, silver, and more. This ties real value to the currency, unlike the current USD, which is backed by nothing and can be printed at the central bank's authority.
In 2014, the BRICS nations announced the creation of a development bank, the New Development Bank (NDB), intended to finance infrastructure projects and promote economic development in member countries. The BRICS nations have also been working to increase trade among themselves and have signed several bilateral trade agreements that use their currencies instead of the US dollar.
For example, China and Russia signed a deal in 2014 that allows them to trade in their currencies, bypassing the US dollar. This trend has continued, with other BRICS nations following suit and other countries outside of the group. The importance of the BRICS nations in the push for de-dollarization should not be underestimated. The BRICS nations will support and promote any significant change in the world reserve currency as tensions heat up with the West.
The argument for cryptocurrency
The rise of cryptocurrencies presents an interesting link to de-dollarization efforts by the BRICS nations. The crypto market operates outside traditional financial systems and is not tied to any particular government or central bank.
As such, they can be used as an alternative to traditional currencies, including the US dollar.
For example, in Venezuela, where hyperinflation has led to the devaluation of the local currency, Bitcoin has become a popular alternative. If we look at the countries that are most commonly using crypto as a means of payment, the most notable are emerging economies.
Suppose the US dollar loses its status as the dominant global reserve currency. In that case, it will lead to a decline in demand for US equities and an increase in equities in other countries, particularly the BRICS nations.
This would likely result in a shift in the balance of economic power from the US to the East. There would be less demand for US dollar-denominated cryptocurrencies, such as Tether (USDT), and an increase in demand for cryptocurrencies denominated in other currencies, particularly those of the BRICS nations.
This could result in a shift in the balance of power in the cryptocurrency market, with more stablecoins and projects originating from the East specifically being a massive driver of the crypto market.
Alternatively, cryptocurrencies also allow for more efficient cross-border payments, which would come in handy if the circumstances for the US dollar losing value and reserve currency status were to occur. Bitcoin is often touted as a safe-haven asset, especially during economic and political uncertainty. As de-dollarization efforts gain momentum, BTC could become a more attractive investment option for investors looking for a store of value not tied to any government or traditional financial institution. Having its value determined by market demand and supply while also being a decentralized, digital currency, BTC would not be subject to the same risks and vulnerabilities that traditional currencies and financial systems face, such as inflation and manipulation by central banks.
Moreover, with BRICS nations adopting a digital currency stance quicker than countries in the West, opportunities for crypto start-ups and blockchain innovation are likely to be encouraged more, which would cause projects to flock from the West to the East. Already, we are seeing UAE, Hong Kong, Singapore, China, and more taking a positive approach to crypto regulation which is a massive incentive for the industry to build and work with those countries. For projects that specifically deal with cross-border payments like Ripple and Stellar, the CEO of Ripple, Brad Garlinghouse, has stated in an interview that “the Middle East is the company’s fastest-growing region” and that if the US doesn’t provide regulatory clarity, projects will up and leave.
In the context of de-dollarization, regulatory clarity is critical. Suppose BRICS countries want to attract investment and talent from the global crypto industry. In that case, they must provide a clear and supportive regulatory environment encouraging innovation and growth in the cryptocurrency market.
It should be stated, however, that cryptocurrencies are still in their infancy and face many challenges, including uncertainty and volatility. As such, whether they will be able to replace the US dollar for investors' portfolios or even act as a hedge against devaluation remains to be seen.
The Bottom Line… Debt
Having talked about this on my channel, we, as traders and investors, should look out for a significant macro event: the coming sovereign debt crisis. A sovereign debt crisis could accelerate the de-dollarization process by reducing confidence in the global financial system and the ability of the US dollar to serve as a reliable store of value.
In a sovereign debt crisis, a country cannot repay its debt obligations, leading to a loss of confidence among investors and a potential default on its debt. This could trigger a broader financial crisis and cause investors to seek alternative investments unrelated to traditional reserve currencies. The coming deflation facing the American market is likely to nuke equities to new lows, and as investors and traders, we need to be aware of this.
The Great Depression started in 1929, and during the following 3 years, the price of gold nearly tripled. This was down to a deflationary crash in America that reduced the dollar supply by 70%. If you look at debt today, approximately 85% of money today is debt, so the effects of the crash could be very similar to an extent, and that is the bottom line.
The reason I talk about the coming sovereign debt crisis is linked to the rising price of gold, which is approaching record levels. Central banks have attempted to prevent this trend by accumulating gold at a rate exceeding any other period in the past 70 years. While some central banks were sellers of gold in the years leading up to 2010, they have since become net buyers, with China, Russia, Turkey, and India being the most prominent buyers between 1999 and 2021. This accumulation of gold is highly concentrated, with the top 10 buyers accounting for 84% of all gold purchases, indicating a need for even distribution among central banks.
This means that the BRICS nations are concentrating their efforts on accumulating as much gold as possible while they see the US heading toward a disastrous sovereign debt crisis.
As investors seek alternative investments, digital currencies like Bitcoin, as stated before, could become more attractive as a store of value, mainly if they are seen as more stable and secure than the USD.
The sovereign debt crisis could benefit BRICS nations in a few ways. First, losing confidence in traditional reserve currencies, such as the US dollar, could increase demand for alternative reserve currencies, including those offered by BRICS nations, such as the Chinese yuan or the Russian Ruble. This could lead to increased use of these currencies in international trade and investment, boosting their value and increasing their standing as reserve currencies.
A sovereign debt crisis would also reduce developed nations' economic and political influence, particularly the United States and the EU. This would create an opportunity for BRICS nations to increase their influence on the global stage and push for reforms to the international financial system that would benefit their interests. Moreover, a sovereign debt crisis would increase commodity demand, such as oil and minerals, major exports for many BRICS nations. This would boost their economies and help offset any negative impacts of the crisis.
Another vast potential is based on the fact that many investors are not keen on the Yuan as a restrictive currency flawed by China’s capital controls. In this case, the sovereign debt crisis could potentially catalyze cryptocurrencies to decouple from traditional finance. This is because cryptocurrencies, like Bitcoin and Ethereum, operate independently from formal financial systems, not tied to any specific currency or government. Moreover, the underlying technology of blockchain offers a transparent and secure means of recording and verifying transactions. This would make them more appealing to investors seeking an alternative to traditional financial systems that may be vulnerable to manipulation or fraud. In this instance, BTC could very likely decouple from the USD and traditional equities markets, where it has been almost symmetrical to the S&P500, and make a path on its own.
This would enable sectors within Web3, such as GameFi, NFTs, DeFi, and more, to build and innovate without worrying about ties to the US economy. It should be mentioned, however, that significant liquidity comes from the US markets, so something like this would require a tremendous amount of investment and opportunity from the East into startups and current projects. To fuel the crypto market on its own would mean hedge funds, institutions, and market makers would have to choose to collectively navigate the space regardless of the US’s stance, distancing from geopolitical and economic tensions.
The rise of cryptocurrencies is likely something the West experiences; however, if regulation is not in place, it could negatively impact everyday people. On the positive side, it could lead to more efficient and secure cross-border payments, lower transaction costs, and increased financial inclusion for those who aim to maintain some store of value. On the negative side, the poor UI and process of sending addresses back and forth would only make cryptocurrencies subject to increased fraud, hacking, and other security risks.
Impact on People Working in the Crypto Industry
For those working in the crypto industry, if the US dollar loses its status as the global reserve currency, it would shift the balance of power in the cryptocurrency market, with cryptocurrencies denominated in the money of the BRICS nations becoming more dominant.
This would present opportunities for those working in the crypto industry, particularly in the BRICS nations, as demand for their services and expertise could increase.
Crypto innovation would shift to the East, as countries like China, Japan, and South Korea have shown a strong interest in blockchain technology and cryptocurrencies. These countries have a large population and highly developed technological infrastructure, which could make them attractive locations for crypto innovation and startups. China, in particular, has been investing heavily in blockchain technology and has already taken steps to be ahead, launching its digital currency, the digital yuan. This exemplifies China’s desire to be ahead of the United States in innovation for crypto.
Stablecoins pegged to the US dollar, such as USDT and USDC, would also lose value as demand for US dollar-denominated assets declines. The industry would likely require significant reforms in new stable currencies or use BTC as such. Stablecoins pegged to other currencies, particularly those of the BRICS nations, could become more attractive to investors and users. This could lead to increased demand for stablecoins denominated in the money of the BRICS nations and increased competition among stablecoin projects.
Conclusion
The push for de-dollarization is in full flow, with significant efforts being encouraged by the BRICS nations. The past two weeks are an early insight into what’s to come over the coming months, with more and more countries denouncing their decrease in USD-denominated foreign reserves. It should be strictly remembered that this process will take a while to play out ultimately. This is because 70+ years of USD consumption and debt has been taken on by countries globally, and shifting this off of balance sheets while also waiting for loans to mature is a straight-time game. It should, however, not be overlooked what the implications this poses for risk-on assets and the effect de-dollarization will have on everyday people.
The significant repercussions on stocks and crypto will be felt as these efforts unfold, and geopolitical circumstances can easily sway the tide entirely if needed.
As de-dollarization efforts continue, it will be necessary for investors, businesses, and individuals to monitor developments in the global financial system and adjust their strategies accordingly.
Additionally, crypto industry workers must adapt to market and regulatory environment changes and be prepared to capitalize on new opportunities.
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As a reminder, this is not a trading signal or investment advice; it is an opinion, and each trader/investor should know and understand the risks of trading cryptocurrencies. This should not be regarded as financial advice; feel free to familiarise yourself with our NFA disclaimer.
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