Will Technology Erode the Dominance of the Dollar?

Financial technology is allowing new entrants to test alternatives to the wholesale markets for global payments and settlement systems. These new projects are in the nascent stages; where they have been launched, volumes are tiny. But they are growing, not least because their state-of-the-art capabilities contrast with decades-old existing systems.

An expanding list of countries are showing interest in possible wholesale settlement alternatives after a surge in sanctions related to the Ukraine war. Driving at least some of that growth is wariness over the West’s ready use of sanctions as a leading instrument of statecraft.

Discontent over dollar-centric finance is as old as U.S. global hegemony. The targets of sanctions, like Russia, have obvious incentives to find alternatives to the Western settlement systems from which they’ve been kicked out. But the growing use of sanctions has fueled unease even among some who aren’t geopolitical rivals to the U.S. or its allies.

Sanctions aren’t the main driver of alternative settlement systems. Most innovators want to use new technology to settle cross-border transactions quickly, safely, and easily. But for U.S. rivals, the chance to sidestep the dollar—through point-to-point bilateral transactions that don’t touch the greenback—has been coveted for years.

This is now happening among rivals from China to Russia, and the trend shows the potential to grow, said Josh Lipsky, this week’s guest on The Call and senior director of the Atlantic Council’s GeoEconomics Center. “Financial technology is finally catching up with the demand,” Lipsky said. The Call is a morning video update offered to our members by the Chamber’s Global Intelligence Desk.

This dollar isn’t about to be unseated as the world’s currency. Few see that happening soon, if ever. Central banks hold massive amounts of their foreign reserves in dollars, more than all other currencies combined. The dollar remains the focus of the world’s foreign exchange markets. Global trade relies on the greenback as the trusted unit of value.

Rather than replace the dollar, technology offers a vision of a world without one dominant currency, in which most trade happens directly between nations, rendering a global currency unnecessary. This is getting easier with technologies developed with cryptocurrencies, including distributed ledgers, tokens, and the blockchain. But despite these technological advances, that vision remains a way off.

The current global demand for the dollar brings advantages to Americans, not least of which are lower borrowing costs. Losing those advantages, even marginally, would hurt. But the immediate threat is an erosion of the U.S. ability to sanctions those who pose threats to the U.S., its allies, or the global order.

Sanctions for years have been a tool used in conjunction with diplomacy and the threat—implicit or explicit—of military force. But in recent years, sanctions have increasingly been seen as an alternative to the messy business of direct engagement, making even some countries that are friendly to the U.S. uncomfortable.  

This dynamic fueled talk—if little action—for alternative payment systems at the recent BRICS summit. That caught the attention of president-elect Trump over the weekend, who expressed a dim view of any country moving away from the dollar. 

Russia, this year’s BRICS host, has led the resistance. Since the 2014 annexation of Crimea, which resulted in sanctions, Russia has been working on an alternative to the Society for Worldwide Interbank Financial Telecommunications—known by its acronym SWIFT—as well as an alternative to the West’s credit card-based payments systems.

When more sanctions came down hard after Russia’s invasion of Ukraine, Moscow was ready and managed to sidestep some of the pain. “Since back in 2014, we have been developing our own systems,” Elvira Nabiullina, the governor of the Central Bank of Russia, was once quoted as saying, citing the “risks” to using existing global financial networks.

The wholesale markets are following dramatic changes in retail payments. From China to the Bahamas, new payment systems are changing how world citizens settle retail transactions. India’s Unified Payments Interface, free to any citizen, shop owner, or street stall operator, now accounts for 14 billion monthly transactions.  

It was only a matter of time before waves of retail innovation washed into the wholesale markets for the settlement of trade and bank transfers. But the wholesale projects—which require multi-state cooperation—are seeing shifting alliances, even in their early stages.  

In late October, the Bank for International Settlements, a global regulatory body, left a proposed system called Project M-Bridge, which sought to link various countries’ digital currencies. BIS said it is up to its M-Bridge members—China, Hong Kong, Thailand, the United Arab Emirates, Saudi Arabia, and a slew of observers—to get the new system across the finish line on their own. 

BIS, instead, seems to be throwing its weight behind another initiative called Project Agora, which involves a different set of players, including the central banks from countries that dominate the current system: the U.S., France, Japan, the U.K., Mexico, Korea, and Switzerland. Dozens of money center banks from around the world are also joining Agora. 

Agora will take years, and some say the U.S. and its allies have been too slow to respond to the growing alternatives to the dollar-based system. But the signaling of a Western effort to join the fight for a new, more efficient payment systems—for an upgrade the dollar-based system—is welcome.

“The drive for payments autonomy, fueled by technology, is perhaps the most underappreciated risk” to U.S. dollar hegemony, said J.P. Morgan in a recent report. 

About the authors

Jay Sapsford

Jay Sapsford is Senior Vice President for Global Risk Analysis and helps lead the Chamber’s efforts in assessing geopolitical and economic risks that impact the business community. He plays a key role in identifying global trends, risks, and opportunities on behalf of the Chamber’s membership.

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