The Great Crypto Game

The geopolitical turbulence roiling many parts of the world threatens to ramp up this year given the idiosyncratic nature of global leadership, whether it be the United States, China, Russia or various Middle Eastern, European and Latin American nations. Ergo, it is only natural that many sovereigns, especially those at the receiving end of the Trump-led sanctions regime, begin to seek alternatives to the de facto global reserve currency that is the US dollar. Bitcoin and other cryptocurrencies, with their fundamental properties of immutability and sovereign-grade censorship resistance, seem custom-built for this purpose. Cryptocurrencies will play an increasingly important role in an increasingly volatile world.
The US dollar’s powerful status has conferred upon America, the current (but arguably fading) alpha-dog of global geopolitics, an asymmetric advantage. If the whole world wants your currency, you can just keep printing it, deficits (and sadly, inflation as well) be damned. Even your rivals will need to play by your rules and drive demand for your currency. (Of course, there is a long-term cost to it. In the long run, this leads to inflationary cycles, increasingly amplified bubble-and-bust cycles, and the like, as well as, of course, libertarian responses such as bitcoin.)
Being alpha-dog sometimes also demands baring teeth to keep the pack in line. Presumably under pressure from the US government, the Belgium-based Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, cut off the access of some Iranian banks and financial institutions to its network. This precludes Iranian banks from settling their import and export bills and exerts more pressure on the already depressed Iranian rial.
From a libertarian perspective, this demonstrates the implicit threat of punitive measures and violence that centralization engenders – a hegemon unchecked; a dominant entity unilaterally weaponizing its economic power and wielding it indiscriminately against another entity or group of entities.
 

The BGRI is primarily a market attention indicator, gauging to what extent market-related content is focused on geopolitical risk. The higher the index, the more financial analysts and media are referring to geopolitics. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average.
 

This chart plots the relative probability of a particular geopolitical event happening against its relative scale of impact on global equities.
In crypto, an alternative global reserve currency
Predictably, Iran is not taking this lying down and is responding in kind, of the crypto variety. It is in the process of creating a rial-pegged digital currency that it plans to use as a token and as a payment instrument that will be used in payments and banking settlements. Considering how Venezuela’s ‘petro’ – a state-backed digital currency whose value is tied to crude oil prices – received backlash from both crypto and political communities around the world, a crypto rial might not be a significantly better solution.
In the absence of traditional payment rails, however, and with hindsight informing a better token design as compared to the petro, Iran could, at the minimum, leverage the blockchain to transact with its trading partners. However, given that the crypto rial would be issued by a centralised entity backed by a highly volatile rial, it is hard to see it reaching the scale of a truly decentralized crypto like bitcoin.
Countries like Russia and China, too, are considering plans to issue their own Central Bank Digital Currencies, or CBDCs, which are basically government-backed “stablecoins” – cryptocurrencies whose values are pegged to fiat currencies. While these countries might be open to having alternatives to the US dollar, they are likely more worried about capital flight from within their borders, which is a real threat with cryptocurrencies in general and with stablecoins specifically.
Although private entities could probably design stablecoins better, it will be difficult in the near term for them to come up with straightforward, scalable implementations of the Russian ruble, the Chinese renminbi or the Indian rupee. Besides, any support from a government to any private entity to design a stablecoin can go wrong in many, many ways.
Why Russia would want to acquire bitcoins
But, quite clearly, there are multiple challenges to designing stablecoins. If a nation cannot roll its own crypto, and will not let its entrepreneurs roll it for the government either, the easier option, at least in the near term, is to buy it.
As per rumours, Russia, which holds about $460 billion in foreign currency reserves, is considering a coordinated, official investment programme to acquire bitcoins. The move will be aimed squarely at fighting the detrimental effects of US sanction. Needless to say, if the rumour turns out to be true at some point, bitcoin would get an unprecedented boost, from an adoption standpoint. The high-impact but hitherto theoretical use case of bitcoin being a non-sovereign reserve asset class for nation-states looking for an alternative to dollar hegemony would have finally come to fruition. It would set a template for other nations that might feel wronged in a US-dominated world.
Let us assume for a moment that the Russian bitcoin acquisition happens. At current prices, Russia would own roughly 15% of the bitcoins in circulation globally. The price crash of 2018 might have made bitcoin more attractive from a valuation standpoint for the Russians to consider investing on such a large scale. Of course, prices would jump exponentially if Russia were to buy $10 billion worth of bitcoins, and it would require a concerted operation across markets over a period of time for the Russians to acquire this amount.
Things will get really interesting if and when other countries follow suit and start buying bitcoins to diversify their foreign currency reserve base. At a 20% deployment into crypto by US sanctioned nations, there could be over $140 billion worth of sovereign demand for BTC.

The analysis will, of course, get even more interesting as there is broad regime-mandated buying across nations, including those that are not necessarily sanctioned but just want to hold some crypto in their sovereign reserves. There is also a network effect at play here. India and Iran, for instance, already trade oil for other commodities, outside the petrodollar ambit of the OPEC.
There is nothing theoretically stopping them from settling trades in bitcoin, or currencies that support anonymity, such as monero or ZCash. It is not inconceivable that a number of regimes have already accumulated sizeable reserves of secrecy coins such as monero or ZCash, or have plans to do so.


Why private stablecoins need to flourish
Designing CBDCs, or government-backed stablecoins, is complicated, to put it mildly. There are multiple approaches to creating a stablecoin, but the simplest fundamentally involve plain old asset collateralization. The issuing entity, whether it be a sovereign or a private entity, effectively collateralizes a certain amount of currency and issues equivalent cryptocurrency against it. USD Tether, for example, collateralizes US dollars in a bank account and issues tokens termed USDT against this collateral. In its simplest, most intuitive form, the collateral-to-token issuance ratio is always one-to-one.

Just who can actually issue a stablecoin? Technically, anyone can, including private entities. Some stablecoins are completely decentralised, such as the US dollar-pegged DAI. Most USD-pegged stablecoins in circulation are not government-backed, and so, technically, are not CBDCs. In addition to the USD Tether, there is GUSD, or Gemini USD, issued by the Winklevoss twins. Other notable ones include CUSD, or Circle USD from Circle, the Goldman Sachs-backed crypto entity, as well as PAXO, which is supported by Itbit, a cryptocurrency exchange.
Here, we see an interesting divergence emerging. The US might be cautious about cryptocurrencies, especially after the ICO scams, but it should have every incentive to let USD stablecoins that are not CBDCs flourish. Every USD stablecoin issued is ultimately driving up demand for the good old-fashioned US dollar, thus further cementing the US dollar’s status as a global reserve currency.
Conclusion
In an increasingly polarising world, it is only natural that nation-states, in addition to investing heavily in exploring crypto versions of their currencies, also look at diversifying their foreign exchanges reserves by investing in non-sovereign currencies like bitcoin. Sanction-hit countries such as Russia and Iran will be among the earliest to take the first step toward ‘de-dollarisation’ as their currencies are at the highest risk of significant devaluation, owing to the impact of US-sanctioned embargoes on their export/import operations and trade settlements.
More broadly, though, there are a few things worth pointing out:

• Geopolitics moves technology and innovation in mysterious ways – If Iran is able to pull off the crypto rial with even a modicum of success, even if the crypto rial, in the absence of SWIFT, manages to unclog frozen bilateral trade lines with partners like Turkey, Russia, China, India, etc., and makes flows more efficient, more timely in just government-to-government trades — that will be a huge win for crypto. One could presumably see a number of countries speeding up efforts to build crypto versions of their currencies, resulting in a spurt of new local currency stablecoins across the globe. However, it will only be the US and a few others that will allow stablecoins from private entities to flourish.
• Separately, this will provide impetus for the European Union, China, Russia and other entities to continue to push for ‘de-dollarisation’ of the global economy, and to look for other payment infra and rails that are not so heavily linked to the US dollar. Attempts to design an alternative to the US dollar as a global reserve currency will certainly be pursued with renewed vigour.
• Crypto does make for some strange bedfellows; some of the leading champions of crypto are to be found in the periphery of the mainstream global discourse, the traditional ‘bad boys’, such as Russia, China, Venezuela, and now Iran, at least as per the dominant narrative laid down by the predominantly Anglo-American focused global media. Paradoxically, these are normally the countries that one would expect to come down heavily on something like crypto, given the need for these governments to exert control. Strangely enough, in order to make a case for their ‘cryptofiats’ or local currency stablecoins, internationally, they need to legalise cryptocurrencies internally, as is the case in Venezuela.
• We might well be seeing the beginning of a new ‘currency’ war, a paradigm war rather. We are also seeing a fragmentation of consensus realities, with a multiplicity of blockchain frameworks, but this time broadly around political and ideological lines. Unlike much of the Anglo-speaking world, China (and to an extent Russia), have had their own Alibabas, Baidus and WeChats for every Amazon, Google and Facebook. If we agree that currency is just a consensus reality, whether it be dollar or bitcoin, we should not be surprised that governments are now influencing the definition and the emergence of new consensus realities in the spheres that they can control.
• While it might be difficult for nation-states to design CBDCs that reach scale in the near term, certain features of the blockchain make it hugely attractive to regimes that have a command-and-control mindset. Especially, when it is coupled with the ability to design a ‘custom’ version of the blockchain and unilaterally impose this version on a pliant populace, a good majority of which do not have the international or transborder physical or digital mobility to protect themselves against such regime. Paradoxically, this might drive up demand for the real, decentralised thing! As we see in the case of Venezuela, a defunct regime has resulted in bitcoin being adopted as the de facto currency, in spite of the existence of the CBDC petro, backed by sizeable petroleum reserves. While the petro might prove to be nothing more than a desperate fourth-quarter hail-mary from a flailing regime, ongoing efforts by Iran, Russia et al will be interesting in the way they evolve and redefine a new era characterised by an unprecedented overlap of technology, economics and politics.

Ramani Ramachandran is the Cofounder & CEO of ZPX, a Singapore-based blockchain firm that has launched projects such as www.108token.com, a crypto index, www.satoshiand.co, a crypto research and analysis platform, and the world’s first stablecoin-focused DEX at www.fordex.co