Petrodollar warfare in the age of cryptocurrency

Here is an interesting quote from an interesting source on an interesting subject. It may mark the beginning of a rapid change in geopolitical and economic power.

“China can also issue such a [crypto]currency by itself. Why wait for others to issue it? The power of a country is always stronger than an Internet company.”

That quote comes from, Ren Zhengfei, the founder and CEO of Huawei.

It was in answer to the following question, put to him at a press event with the Italian media:

First, we know that Facebook has announced that it will issue a digital currency based on blockchain, called “Libra Coin”. Do you think this is a US technology company to maintain the world hegemon with the US government? signal of? Second, do you think that when issuing digital currency, will they consider Chinese companies or put Chinese currency in their currency baskets?

This statement by a very prominent Chinese tech darling – which is also much hated by the US – comes after reports that China is indeed developing its own national cryptocurrency.

From Cointelegraph:

The comments follow concerns from China’s central bank, the People’s Bank of China (PBoC), that Libra could pose a threat to the country’s economy in some respects.

As Cointelegraph reported, earlier this month, the PBoC’s director, Wang Xin, said that if Libra is mostly pegged to the U.S. dollar, China would be at a disadvantage.

“If so, it would bring a series of economic, financial and even international political consequences,” he claimed.

Beijing is reportedly in the process of developing a digital currency of its own, while the exact details of its use cases remains unknown.

This is very different to Iran and Venezuela’s questionable national cryptocurrency efforts, which I reported on last week. It’s a much bigger deal, especially to the US the dominance of its US dollar.

Think about it. If China were to create a digital renminbi, which could be traded, held and transferred just like any other cryptocurrency, it could get mass adoption all around the world.

And not just in those parts of the world that have an established banking system set up, but “unbanked” areas with huge populations.

India, for instance, has 190 million unbanked. And China itself has 225 million unbanked.

From Business Standard in April:

China is home to 225 million adults without a bank account, India has 190 million. They are followed by Pakistan (100 million) and Indonesia (95 million).

“These four economies, together with three others – Nigeria, Mexico and Bangladesh – are home to nearly half the world’s unbanked population,” the [Global Findex] report said.

But here’s the really interesting part.

According to the report Business Standard is referencing:

Globally, 1.7 billion adults remain unbanked, yet two-thirds of them own a mobile phone that could help them access financial services. Digital technology could take advantage of existing cash transactions to bring people into the financial system

So there are 1.12 billion people in the world who own a mobile phone but not a bank account.

What if those 1.2 billion people suddenly got access to a digital renminbi, issued by China, which didn’t require them to have a bank account?

Suddenly China’s national currency would become a real rival to the US dollar’s dominance.

Remember, having the world’s dominant currency puts your country in a supreme position of economic power.

From the petrodollar warfare entry on Wikipedia (emphasis mine):

The United States dollar remains de facto world currency. Accordingly, almost all oil sales throughout the world are denominated in United States dollars (USD). Because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and ostensibly supports the USD’s value, regardless of economic conditions in the United States.

According to proponents of the petrodollar warfare hypothesis, this in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than supposedly they otherwise would be able to. As a result, the U.S. government, according to this theory, can run higher budget deficits at a more sustainable level than most other countries can. The theory points out that a stronger USD also means that goods imported into the United States are relatively cheap (although the country’s exports become relatively more expensive for the rest of the world).

So, if China started challenging the US dollar for world dominance, what would the US do to retaliate?

I imagine many of you reading this will be thinking war. But wars are expensive and extremely dangerous. Why take such a risk when they US has another option?

And that other option is… beat them at their own game.

If this scenario really does become a reality – and let’s not forget, China is creating a national cryptocurrency – I would imagine that the US would quickly follow suit.

Within a year of China launching a digital renminbi, we could very well see a digital US dollar.

The switch over from traditional money to national cryptocurrencies could happen faster than anyone realises.

And let’s not forget, these currencies would be tradeable with other cryptocurrencies, which would make “fiat on-ramps” a thing of the past. The barriers to entry would collapse.

But then people could freely trade between cryptocurrencies like bitcoin and national cryptocurrencies like a digital US dollar. After that, there’s no telling what could happen.

The US must have already thought all this through, so it will be interesting to see what moves it will make if/when China launched its national cryptocurrency.

There’s never a dull moment in crypto, that’s for sure.

And if you’d like to know more about crypto, a great place to start is with my colleague Sam Volkering’s book: Crypto Revolution.

Inside you’ll discover a step-by-step guide to understanding cryptos, as well as everything you need to potentially profit from this latest tech boom. Including…

  • How to set up your own crypto wallet (this is how you securely store your crypto)…
  • How to buy, sell and secure your cryptocurrency…
  • The new “crypto king” Sam’s backing to unseat bitcoin as the world’s number one crypto (and in the long-term, potentially hand you $68,492 for every $200 you lay down today)…

Get your copy here.

Until next time,

Harry Hamburg
Editor, Exponential Investor

Category: Cryptocurrency

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