Bitcoin and the Transformation of Geopolitics

  • The increasing adoption of bitcoin will have important geopolitical implications and may disrupt international power dynamics
  • Bitcoin’s decentralisation makes it less likely to be abused by state actors
  • A resulting multipolar economic order could turn out to be more stable and peaceful

Bitcoin is issued and controlled by no person, government or entity. Yet, through its immutable qualities and widespread adoption, it has the potential to disrupt international affairs.

New Player

On 19 November, in a panel called “Great Power Competition: The Emerging World Order”, former Secretary of State Hillary Clinton issued a stark warning regarding the rise of cryptocurrencies. She said “nation states are going to start paying more attention to… the rise of cryptocurrency, because [it] has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilising nations — perhaps starting with small ones, but going much larger.” She went on to say that it “appears as though China is going to prevent outside technology payment systems, like the cryptocurrency development, from playing a big role inside China because… they’ve recognised… that this could be a direct threat to sovereignty.”

Hillary Clinton’s statements confirm the geopolitical importance that cryptocurrencies and bitcoin, in particular, are starting to take on the global stage. Bitcoin’s threat to sovereignty, national currencies and the global reserve-currency status of the US dollar could revolutionise global power dynamics. Those nations that will be able to absorb and accommodate bitcoin, through sensible legal frameworks, will have an advantage over those unable to compromise by virtue of their centralised systems. That is why the US is able to host listed companies with bitcoin holdings, bitcoin ETFs and a significant part of the industry, while China has had to resort to a ban.

New Game

The US dollar is called the reserve currency of the world and, because of that status, it is considered a global store of value. It constitutes a majority of foreign currency reserves and foreign-held sovereign debt. Global commodities and investments are also primarily denominated in US dollars, while the US-dominated SWIFT network sets the standard for international payments. This gives the US government and its financial sector a disproportionate amount of economic influence, which it uses to project its power on a global scale. Nixon’s Treasury Secretary, John Connally, famously said the dollar “is our currency, but it’s your problem”.

The US dollar gained this status in the aftermath of the Second World War when it was still backed by gold. The ability to redeem dollars for gold is what made the international community consider it the world’s sound money and a store of value. No rival national currency has been able to dethrone the US dollar, despite it leaving the gold standard in 1971. As most, if not all, governments have been equally debasing their currency ever since, no viable sound-money alternative has emerged. Bitcoin, through its immutable supply and growing user base, however, has finally provided an alternative as a store of value.

Within the present context of uncontrollable global inflation, bitcoin, as a store of value, will become increasingly appealing to a broader population. It will also appeal to nations wanting to gain independence from the dollar and the reckless monetary and fiscal policies of the US government. They will increasingly feel that they are shouldering the weight of US monetary excesses and look to the only viable alternative. El Salvador, in this respect, may just be the canary in the coal mine with other nations soon to follow. Should enough people and nations adopt bitcoin as a store of value, then the dollar’s status, as global reserve currency, would end. This, in turn, would have monumental geopolitical implications. A rival could replace it or, alternatively, nobody would need to assume the mantle of steward of the world’s reserve currency.

New Rival

Peter Thiel called bitcoin a “financial weapon” used by China against the US, earlier this year. Despite bitcoin being decentralised, there was, for some time, a risk that China could dominate the bitcoin network with consequential geopolitical implications. Dethroning the US dollar as the world’s reserve currency makes sense in its efforts to become the world’s dominant power. China has already reduced purchases of US Treasury notes, increased gold reserves and launched the Belt and Road initiative in line with this objective.

Maintaining and capitalising on its dominant role in the bitcoin network could have further contributed to China’s geopolitical objectives. As a first step, it could have propagated the widespread use of bitcoin by individuals and governments. On a sovereign level this could have targeted countries looking to sever their dependence from the US and US-controlled international financial institutions and those with troubled monetary situations. China could then have encouraged other, bigger countries to join. This could have been done through diplomatic persuasion or by orchestrating economic crises followed by protests and uprisings.

The next step in this strategy would have been to control the bitcoin mining industry, which accounted for over 50% of the world’s mining power until February 2021. Overnight, they would have found themselves in a position to attempt to manipulate the bitcoin network and its record of transactions by performing a 51% attack. Direct nationalisation would have jeopardised trust in the network, which means they would have had to employ subtler means to achieve this level of control. This could have been in the form of control or intimidation over China’s miners.

To complement this power, China could have also accumulated vast amounts of bitcoin, through a number of proxies, to become a mega-whale in the network. This would have given them the ability to control bitcoin’s price. As Saudi Arabia did with oil in 1973, China could have controlled the price of the world’s new reserve currency. This would have placed them in an unparalleled geopolitical position of strength.

But China suddenly surrendered this geopolitical advantage after its blanket ban on the crypto industry earlier this year. Part of the explanation may be a result of domestic challenges posed by the collapse of Evergrande and its peers. The Chinese government needed to strengthen its grip over monetary policy to save the domestic economy. The centralisation of monetary power required the extinguishing of a decentralised network, as domestic factors trumped broader geopolitical goals in the short term. Regardless of Evergrande and as expanded below, it was only a matter of time before a highly centralised system would have naturally rejected a decentralised system like bitcoin. This natural incompatibility with decentralisation is also why China is among the first to enthusiastically trial CBDCs.

Whatever the reasoning, the ban on bitcoin may turn out to be a blunder of historic proportions. In an act of geostrategic self-harm, China sacrificed a crucial instrument in its efforts towards global dominance. With China out of the picture, bitcoin mining has dispersed across a greater number of nations, thus further decentralising the network. This will not remove bitcoin from the geopolitical arena but, instead, allow it to transform the arena entirely.

New System

A situation in which no country dominates the bitcoin hash rate and bitcoin is widely accepted as the global store of value, could lead to a multipolar or nonpolar global economic system. In this system, no government or entity would be able to dictate its wishes by weaponising this type of economic value. This new level playing field would remove one of the global imbalances of power, which could, in turn, promote diplomacy and compromise in international affairs.

Beyond that, by default, bitcoin strengthens decentralised liberal democracies to the detriment of authoritarian regimes. Liberal democracies are systemically capable of absorbing decentralised systems like bitcoin. Centralised, authoritarian regimes, by contrast, are antithetical to unaltered decentralisation, as it threatens their grip on power. This is why the press, internet and social media are heavily censored in authoritarian regimes.

By providing a viable alternative basis for a monetary system, furthermore, bitcoin reduces a government’s ability to abuse the state’s financial well-being to pursue policy objectives contrary to the benefit of the population. This is particularly relevant for authoritarian regimes that are prone to creating hyperinflationary situations, as they fund lavish spending, corruption and wars by printing currency to the detriment of their population’s purchasing power.

Bitcoin allows citizens of such countries to simply switch away from their national currencies to a system where no government has the authority to manipulate supply. This phenomenon is already taking place in Venezuela and Lebanon, where the adoption of bitcoin is skyrocketing in order to mitigate the disastrous monetary policies of their respective governments. Thus, with or without intentional weaponisation, bitcoin’s continued growth will have consequential geopolitical implications.

New Equilibrium

Bitcoin has become a geopolitical phenomenon. It may threaten the US dollar’s role as the global reserve currency and thus as a globally-accepted store of value. Combined with China’s recent ban, the increased decentralisation and international dispersion of the network means it is less likely to be instrumentalised by any individual government. This could reduce geopolitical tension by putting nations on an equal monetary footing, thus encouraging diplomacy and compromise. By the time politicians awaken to the geopolitical implications of bitcoin, these transformations may have already taken place.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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