Jay Newman was a senior portfolio manager at Elliott Management and is the author of Undermoney. Richard Carty was managing director of Morgan Stanley Principal Strategies and is CEO of Bonanza Creek Energy.
It’s no surprise that the US Treasury — whose remit includes combating threats to the dollar and protecting the integrity of the financial system — is warning Congress that dollar-based digital instruments, stablecoins, and crypto exchanges pose significant risks.
But risks to whom?
Crypto “dollars” won’t collapse the world financial system, but they could disrupt the cosy greenback-based settlement system. Pre-eminence of the dollar as the currency of choice for contractual settlements, coupled with the depth and sophistication of US capital markets, has enabled the US and other Western governments to police bad actors by imposing economic sanctions on people they don’t much like.
Unfortunately for the US and its allies, as events currently unfolding in Hong Kong accelerate, CCP-controlled crypto stablecoins and related exchange transfer platforms will eviscerate this prerogative.
The French have long complained about exorbitant privilege — the ability of the US to finance fiscal policies by printing dollars. For the past fifteen years, the BRICS have taken this to heart, seeking an alternative to avoid Uncle Sam’s heavy hand and freedom to snoop on all their financial dealings.
But the BRICS don’t need to invent a new currency or transfer system. The best “new” money is here: digital dollar stablecoins and other tokenised crypto pseudocurrencies. Unlike the “old” dollar — easily regulated, tracked, and tethered to Washington DC — offshore crypto transfer systems operate outside the extant global regulatory net. They’re effectively stateless.
Dollar-cryptos are, of course, not currencies at all, they are simply components of an alternative money transfer system, akin to Western Union, Fedwire, or SWIFT, but without disclosure or regulation. They are risky “assets” because there is no underlying collateral: essentially, they’re unsecured obligations of the issuer of the token. For the most part, offshore crypto exchanges require no regulatory collateral.
What if those risks were ameliorated?
Large-scale acceptance of crypto tokens can provide a robust settlement mechanism for legitimate economic activities. But they really shine as tools for illegitimate activities, letting all manner of criminals conduct business in dollars while bypassing the oversight mechanisms of the Federal Reserve, the CFTC, the SEC, the IRS, and banks subject to American regulation
One collateral consequence of broad-based acceptance of offshore crypto tokens would be the evisceration of the Trading with the Enemy Act of 1917 and the 1977 International Emergency Economic Powers Act. These provide the foundation for US government sanctions against countries and individuals “to deal with any usual and extraordinary threat, which has its source in whole or substantial part outside the United States.” Those statutes create a national security/emergency hook for actions that are, primarily, driven by foreign policy, criminal enforcement, and economic objectives.
Consider this: had Russia held crypto tokens on a hard drive instead of holding reserve assets at G7 central banks, $600bn of reserves that were blocked by Western sanctions would have been frustrated. Ditto the accounts of hundreds of Russian oligarchs, and those of another 12,000-odd individuals and companies currently under American sanction.
Binance this week pleaded guilty to criminal charges related to money laundering and breaching international financial sanctions, having failed to report suspicious transactions with organisations the US described as terrorist groups including Hamas and al Qaeda. Reuters reported in June that “hackers, fraudsters and drug traffickers”, including groups under US sanctions for assisting North Korea’s nuclear weapons program, have moved at least $2.3bn through the exchange over the past five years.
Threats to the current order are being rendered operational by the Hong Kong-based crypto companies and exchanges with direct ties to the Chinese Communist party (CCP). Everything in Hong Kong requires CCP approval: it’s well documented that the CPP seeks to dethrone the US dollar and the dollar clearing and settlement systems. Not least because of bitter CCP complaints over US sanction policies. It’s natural that the CCP would drive the institutionalisation of Hong Kong as a centre for digital assets — even to the point of “suggesting” Western banks, like HSBC and Standard Chartered accept Hong Kong-based crypto exchanges as clients, thereby creating a critical conduit link to the…
Read More: US dollar dominance is facing a crypto-yuan hostile takeover