El Salvador recently approved a law making Bitcoin — the world’s most popular of more than a thousand cryptocurrencies — a legal currency there as of September. The reaction was immediate, although there was no agreement on the importance of the move. Nor was there much discussion of the important underlying issues of whether some combination of cryptocurrencies will challenge the U.S. dollar as the world’s dominant reserve and trading currency or whether non-governmental digital currencies might eventually challenge government currencies.
The stakes could not be higher, and the cast of characters is head-spinning.
Since the 1940s, the dollar has been the foundation of international trade. All countries and their central banks must hold dollars to engage in trade, and the U.S. government has enjoyed unique controls over international trade such as its ability to impose severe sanctions on adversaries and enemies. Moreover, since the U.S. government controls the supply of dollars, it has the unique ability to run trade and other deficits by printing dollars. Anything that challenges this arrangement threatens fundamental features of America’s stature.
Unlike the Chinese Renminbi (RMB) or the EU’s Euro, cryptocurrencies began as private sector inventions to facilitate payments by avoiding the time and cost of currency exchanges, banks, processing fees, credit card companies, etc. As a result, they are widely classified as “financial assets,” not currencies, by many governments. Because they often involve large asset transfers on the internet, however, cryptocurrencies require extremely secure, internet-centric processes, the most popular of which is called blockchain.
So, blockchain-based, internet-centric, private cryptocurrencies have sprung up as both investments and as de facto currencies.
For many governments — notably China — private sector cryptocurrencies present a threat to the very role of governments and worse, a threat that is controlled by businesses, most of which are American. There is, in this view, no role for businesses or individuals in creating money. Also, for these and many other governments, free-standing cryptocurrencies when used as an investment represent a fraud. Since most private sector cryptocurrencies are not backed by any government currency, they are — in this view — play money worth only what a sinister seller or duped buyer will charge and pay. Nonetheless, freestanding cryptocurrencies, including the leading example Bitcoin, have caught on and are accepted as a form of payment by a growing number of businesses and as an investment by investors worldwide.
Enter big tech.
To offset the fact that many cryptocurrencies are not backed by governments or dollars, some tech businesses — notably Facebook, Uber, Spotify, etc. — have experimented with cryptocurrencies that are legally and explicitly backed by currencies/dollars, so there is no doubt that real cash is redeemable for the cryptocurrency: called “stablecoins.” Like free-standing cryptocurrencies, stablecoins bypass currency exchanges and bank fees, and they offer global, rapid, low-cost ways to make payments.
Enter Venezuela and Russia.
In order to bypass American economic sanctions, in 2018, (with reported support from Russia) the Venezuelan government introduced the Petro, which it described as a government stablecoin backed by Venezuelan petroleum, and it recognized the Petro as currency within Venezuela. Particularly — but not only — because the Petro is an effort to bypass U.S. sanctions, Venezuela’s experiment has been controversial. And almost certainly not a success, since it’s not clear that any country (except perhaps Russia and Iran) or any major businesses have yet to accept Petros as a currency. This probably has as much to do with the size and diversity of the Venezuelan economy as it does with active opposition from the U.S.