Poor Crypto Regulation Will Make the U.S. Dollar Irrelevant in 10 years

How the inability for DeFi to strive in the U.S. will make the U.S. Dollar irrelevant internationally.

The term “crypto” has become a topic of debate in the United States. Some view it as an opportunity for financial gain, while others associate it with illicit activities, such as online drug trafficking and contract killings. As a result, most retail consumers either fully embrace it or reject it outright.

Despite these extremes, there is a growing minority of pragmatic individuals who recognize that cryptocurrency is just one aspect of innovative blockchain technology that is transforming digital finance. This group understands that regulation is necessary to balance innovation and consumer protection, given the potential of this powerful tool.

Have you ever considered how blockchain technology could revolutionize the world’s markets beyond cryptocurrencies? Let’s take a quick detour and visualize what a globalized, blockchain-based financial system might look like.

Fast forward to the year 2040, where our planet is bursting with a staggering 9.2 billion people. But amidst the chaos, there’s good news! Thanks to the World Food Programme’s digital currency distribution system, over USD $50 billion in humanitarian aid has been delivered transparently to 1.1 billion people worldwide. This aid provides everything from life-saving medical assistance to disaster response programs. The best part? Aid efficiency has skyrocketed by a jaw-dropping 500% since 2020, thanks to transactional data that enables UN agencies and multinational NGOs to anticipate and proactively provide necessary resources for any situation. This is a game-changer for humanity, and the world has never looked brighter.

In the United States, retail consumers have increasingly enjoyed unprecedented financial protections and opportunities. Low-income individuals have seen a 50% increase in their access to wealth, due in part to the improved availability of fractional shares of real estate. This has completely transformed the concept of homeownership, making it more affordable and accessible to people of all income levels.

Additionally, there has been a surge of innovative financial products available for purchase in the United States. These include customizable corporate bond indices and digital currencies backed by corporate equity, all designed to meet the evolving needs of modern investors. And the best part? These products come with 100% financial privacy protection while maintaining over 90% automated compliance. But how is this possible? Each product comes equipped with a digital license that automatically enforces compliance with OFAC guidelines, SEC registration, and investor protection regulations. Plus, all transactions are facilitated using secure blockchain technology, ensuring peace of mind for investors.

The story suggests a utopia of economic equity that can realistically be constructed using today’s technology, with blockchain playing a central role. However, there is one conclusive ending missing in the US to make this truly the greatest story of all time. Oh, here it is!

The digital global economy of 2040, which operates on blockchain technology and is worth USD $135 trillion, processes billions of transactions per day that are predominantly denominated in USD.

To stay ahead in the global economy, the US must adopt a blended regulatory approach. Relying solely on enforcement, financial centralization, and compliance ambiguity is a recipe for rendering the USD irrelevant. In this brief, I argue that the future of the American Dollar is dependent on blockchain-based financial systems embracing it.

Blockchain in a Nutshell.

What is blockchain again?

A blockchain is like a digital LEGO tower. Each LEGO block represents a group of information (e.g., financial transactions), and when you add a new block, it connects to the previous one. Everyone can see and help build the tower, making it hard to change or remove blocks without others noticing.

Money.com “What Is Blockchain?”

Blockchain technology is useful because it allows people to store and share information securely without having to rely on a middleman. This makes transactions faster, cheaper, and more transparent. Additionally, regulatory rules can be directly encoded into every financial transaction, keeping consumer safe and exponentially reducing the cost of compliance.

Why does blockchain matter?

Quantifying the exact potential impact of blockchain technology on the global economy is challenging due to its broad range of applications and the rapidly evolving nature of the technology. However, several areas where blockchain technology could have a significant impact can be highlighted:

Cost savings

Blockchain technology can help streamline processes, reduce the need for intermediaries, and improve operational efficiency across various industries, resulting in cost savings. A new report from Juniper Research has found that the deployment of blockchain for cross-border settlement will drive increasingly significant cost savings for banks; rising from USD $301 million in 2021 to USD $10 billion in 2030, representing a cost-savings growth of 3,300%.

In another example, the World Economic Forum estimated that blockchain could save 30% of banks’ operating costs by streamlining the reconciliation and settlement of transactions.

Financial inclusion

Blockchain-based financial services, such as decentralized finance (DeFi) platforms, could provide access to financial services for billions of unbanked and underbanked people around the world, helping to reduce poverty and spur economic growth.

The technology has already been used to disburse millions of dollars of humanitarian aid deployed by the likes of the World Food Programme, Oxfam International, Care, and Hope for Haiti.

Supply chain management

By providing a transparent and immutable record of product provenance, blockchain technology can improve supply chain efficiency, reduce fraud, and enhance consumer trust. The World Economic Forum has suggested that blockchain technology could add USD $1 trillion to global trade by improving supply chain processes.

New business models and industries

Blockchain-based tokenization total addressable market by asset class. Source: Citi

Blockchain technology can enable new business models and industries, such as tokenization of assets, decentralized autonomous organizations (DAOs), and non-fungible tokens (NFTs), which could contribute to global economic growth. Citi explained in its “Money, Tokens and Games” March 2023 report that blockchain-based tokenization of real-world assets to become the next “killer use case” in crypto, with the firm forecasting the market to reach between UDS $4 trillion to USD $5 trillion by 2030.

Crypto is Not Blockchain.

Blockchain technology has been incorrectly equated with one of its features, “cryptocurrency.” Unfortunately, the only “breaking news” about blockchain technology has been the usage of cryptocurrency to defraud, enrich, endanger, and entertain speculative investors, not the underlying technology’s ability to save lives and exponentially reduce intermediary costs.

One example of how the media has negatively portrayed blockchain technology is by focusing on its association with illicit activities, particularly in the context of cryptocurrencies like Bitcoin. News stories about criminal enterprises using cryptocurrencies for money laundering, drug trafficking, or ransomware attacks have contributed to the perception that blockchain technology is primarily used for illegal purposes.

While it is true that cryptocurrencies can be used for illicit purposes due to their pseudonymous nature, this is only one aspect of the technology. Blockchain technology has many legitimate use cases, such as supply chain management, identity verification, and decentralized finance, which are often overlooked in media coverage.

The internet is an example of a revolutionary technology that was initially misunderstood by the American public and negatively portrayed by the media in its early days. In the 1990s, when the internet was starting to become more widely accessible, many people were skeptical about its potential and concerned about its possible negative impacts.

Over time, however, as more people gained access to the internet and became familiar with its benefits, public opinion shifted. The media began to focus more on the positive aspects of the internet, and many of the initial concerns were addressed through legislation, regulation, and technological advancements.

Similarly, as blockchain technology continues to develop and become more widely adopted, it is likely that public understanding and media portrayal will evolve to reflect its true potential and a more balanced view of its applications and impacts.

The US is Unaffected by “Crypto Contagion.”

Poor regulatory guidance, driven by the fabricated concept that the U.S. financial system is threatened by a ‘crypto contagion’, will result in a mass exodus of blockchain innovation. Inadvertently, this will increase the adoption of foreign currency denominations within open financial infrastructure.

If the U.S. does not get its crypto affairs in order to enable American blockchain innovation, the foundation of the world’s digital economy will be developed elsewhere. The currencies in which that economy is denominated will be determined by those regions. Additionally, legacy American financial technologies that currently dominate the world’s landscape will become siloed from newer advents and standards that support blockchain-based financial value chains.

One might retort to these claims, “But if we do not protect the U.S. financial system from the crypto contagion and safeguard retail consumers, we could lose everything!”

I would respond by saying, “The crypto contagion does not exist. Our existing financial system barely protects consumers, and blockchain technology provides a better way to automatically regulate by incorporating consumer protection laws into the financial products themselves.”

The Crypto Contagion Doesn’t Exist

The fabled American crypto contagion doesn’t exist. The U.S. financial market, with a total market capitalization of approximately USD $40.5 trillion, is over 28 times larger than the combined global cryptocurrency and blockchain technology markets.

For reference, the global cryptocurrency market cap is approximately USD $1.049 trillion, a -34.52% change from one year ago. If we combine this with the global blockchain sector’s market capitalization, projected to grow from USD $7.18 billion in 2022 to USD $163.83 billion by 2029 (a CAGR of 56.3%), the total Web3 market size would still be just USD $1.413 trillion.

Additionally, about 50% of the current largest incumbents in the crypto industry are American companies. Here’s a list of some of the most influential companies in the cryptocurrency and blockchain sector, categorized by their country of incorporation and estimated value as of FY22:

United States

• Coinbase — USD $68 billion
• Ripple — USD $15 billion
• Gemini — USD $4 billion
• BitGo — USD $1.2 billion
• Chainalysis — USD $2 billion
• Circle — USD $4.5 billion

China

• Bitmain — USD $12 billion
• Canaan Creative — USD $1 billion

Malta

• Binance — USD $2 billion (hotly debated)

Singapore

• Huobi — USD $10 billion

Strong growth in the crypto sector has poured billions of dollars into the U.S. financial system through modernized banking providers such as Mercury, as well as the now-defunct Silicon Valley Bank and failing First Republic Bank. These failures were reminiscent of poor institutional money management and asset-liability mismatching strategies during one of the country’s largest federal interest rate hikes in recent history (a 1900% increase since 2020), which exposed all of these mid-sized banks to substantial interest risk. Every single one of these banks had largely uninsured customer deposits. The mania of social media only added to the problem, leading to consumer FUD (fear, uncertainty, and doubt) and multiple bank runs.

It wasn’t crypto that killed these banks. In fact, if the U.S. Treasury and FDIC had not provided a guarantee to the depositors of SVB, FRB, and Signature Bank, the banks could have dealt a serious blow to the global crypto markets, as many of the sector’s incumbents (listed above) used the services of these banks.

For example, regulated stablecoin (i.e., digital dollar) infrastructure giant Circle, valued at an estimated USD $4.5 billion, held USD $3.3 billion of its stablecoin reserves at Silicon Valley Bank and nearly lost it all. The company, which provides digital dollar payment infrastructure that is backed 1:1 by U.S. dollars and treasury bonds, has been at the forefront of fostering constructive and proactive relationships with American regulators, and goes to great lengths to maintain OFAC compliance related to its stablecoin USDC.

Given that USDC is the world’s second largest stablecoin by market cap and is widely regarded as the world’s ‘safest,’ cryptocurrency (until its de-pegging caused by the SVB collapse), a lack of regulation mandating mid-sized banks to hold a minimally required amount of insured deposits and cash reserves could have

1. dealt a massive blow to the USD’s prevalence within the cryptocurrency and blockchain sectors globally and;
2. severely reduced international confidence in U.S.-originated digital assets.

We’re Falling Behind in Innovative Regulation

Solidus Labs Research (SLR) reported that in 2022, the four main federal regulators with authority over cryptocurrency — the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the Office of Foreign Assets Control (OFAC) — announced a combined 58 crypto-related enforcement actions, a 65% jump over 2021. Between 2013 and 2022, the four federal agencies have imposed a total of $3.6 billion in fines against participants in the crypto market. The SEC and CFTC have issued the majority of these penalties, amounting to $3.4 billion.

Yet, with increasing enforcement, regulatory ambiguity is still a persistent issue for blockchain market participants seeking compliance and progress in American innovation.

The SEC and the CFTC have been at odds over how to classify digital assets, whether as securities or commodities. The CFTC considers cryptocurrencies, such as Bitcoin and Ethereum, to be commodities, while the SEC has argued that the four of the most common types of crypto tokens being minted today — governance, exchange, utility, and staking tokens — are represented as securities in a complaint the agency filed in FY22.

The disagreement over how to classify cryptocurrencies has led to confusion and uncertainty for companies operating in the cryptocurrency space. Depending on how their particular cryptocurrency is classified, they may be subject to different regulatory requirements. Tension between the private and public sectors is beginning to boil, and companies like Coinbase have taken matters into their own hands by suing the SEC. With its lawsuit, Coinbase is urging the regulatory arm to publicize its response to a separate petition filed back in July 2022, requesting the SEC to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods.”

Meanwhile, the rest of the world is quickly surpassing the U.S. in attracting businesses to incorporate abroad. In particular, the European Union (EU), the United Arab Emirates (UAE), Switzerland, Singapore, Japan, and Malta have all taken significant steps to regulate the use of cryptocurrencies and blockchain technology. These regulations allow for innovation while clearly outlining the necessary steps for operators to remain compliant.

Here is an overview of the regulatory landscape in regions that are considered progressive in providing regulatory clarity for cryptocurrency and blockchain businesses:

1. European Union. The EU has made significant progress in regulating blockchain technology and cryptocurrency. Key developments include the adoption of the 5AMLD in 2018, the approval of MiCA regulation in 2023, and the pilot regime for DLT-based market infrastructures.
2. United Arab Emirates. The UAE has taken a proactive approach to regulating blockchain technology and cryptocurrency. Key developments include the Dubai Blockchain Strategy, the launch of the DMCC Crypto Center, the introduction of the DIFC Crypto Regulations, and the issuance of guidance on crypto assets by the DFSA.
3. Switzerland. Switzerland is often cited as a country with a clear regulatory framework for cryptocurrency and blockchain businesses. The Swiss Financial Market Supervisory Authority (FINMA) has introduced guidelines for ICOs, clarifying how token sales should be conducted and regulated. Additionally, Switzerland has introduced a regulatory framework for cryptocurrency exchanges and has established strict AML/KYC requirements.
4. Singapore. Singapore has established a clear regulatory framework for cryptocurrency and blockchain businesses. The Monetary Authority of Singapore (MAS) has introduced regulations for cryptocurrency exchanges and has issued guidelines for ICOs. Additionally, Singapore has launched the Payment Services Act, which regulates digital payment token services and has introduced licensing requirements for cryptocurrency businesses.
5. Japan. Japan was one of the first countries to introduce regulations for cryptocurrency exchanges. The Japanese Financial Services Agency (FSA) has established a licensing framework for cryptocurrency exchanges and has implemented strict AML/KYC requirements. Additionally, Japan has introduced regulations for ICOs and has recognized cryptocurrencies as a legal means of payment.
6. Malta. Malta has established a regulatory framework for cryptocurrency and blockchain businesses, positioning itself as a “Blockchain Island.” The Malta Financial Services Authority (MFSA) has established guidelines for ICOs and has licensed several cryptocurrency exchanges. Additionally, Malta has introduced the Virtual Financial Assets Act (VFA), which regulates digital asset-related activities and introduces licensing requirements for cryptocurrency businesses.

As counties continue to better define compliance guidelines for crypto-companies, and American regulatory ambiguity regarding the blockchain industry persists, the exodus of blockchain technology talent and corporate tax revenue will accelerate, and American fintech competitiveness will sharply decline.

Blockchain Innovation is Leaving the US

The exodus of blockchain innovation from the United States is not a figurative expression. Billions of dollars are leaving the U.S. economy as the American cryptocurrency and blockchain sectors shrink under the pressure of regulatory ambiguity.

• Circle, the issuer of the USDC stablecoin, is opening a new office in Paris because, as Circle’s chief strategy officer has stated, “France is increasingly seen as a leader in crypto.”
• Coinbase, a crypto-industry giant and long-regulator aligned cryptocurrency exchange, which serves as the door to the world’s cryptocurrency markets for many, has floated the idea of leaving the U.S. if regulatory clarity doesn’t improve.
• Binance US, the American subsidiary of cryptocurrency exchange and Coinbase competitor Binance, terminated a USD $1 billion acquisition deal with Voyager, citing a “hostile and uncertain regulatory climate in the U.S.” for the decision.

If Circle, Coinbase, and Binance (US) were to depart from the U.S., the nation’s blockchain sector would shrink by at least 50% by total corporate market capitalization. American startups are incorporating in regions such as the Cayman Islands, Dubai, the British Virgin Islands, and Switzerland to ensure that their entrepreneurial blockchain passions persist. It won’t be long until these companies mature into the next global industry titans.

De-Dollarization is Real, But There’s Hope

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The US Dollar’s status as a reserve currency has significantly declined in recent decades. In real terms, the US Dollar’s share of total global reserves has fallen from about 66% in 2003 to 55% in 2021, and further to 47% in 2022. This 8% decline in US dollar reserves over the last year is particularly concerning, as it is roughly 10 times the average annual decline over the past two decades.

One major accelerant responsible for the USD’s decline as a global reserve currency is that foreign central banks have been divesting themselves of US dollar-based assets in response to the U.S.’s currency-based sanctions related to the Russia-Ukraine war.

Seeking Alpha — Foreign Treasury Holdings (St Louis Fed)

Interestingly, the main reserve replacement hasn’t been another major currency (Euro, Yen and Yuan reserves are up <4%), but rather, it has been gold. 1,136 tonnes were added in 2022, the largest central bank increase in gold reserves on record. With emerging economies such as Russia and China leading the way.

The Dollar Still Rules Global Transaction Volume..But..

The US Dollar is the most commonly used global reserve currency, accounting for 96% of international transactions from 2009–2019. This creates lasting network effects, as people worldwide trust the dollar’s value. However, its percentage of global transactions has decreased to 88% by April of last year. This decline follows a pattern of previous dominant trade currencies, which declined in use as they switched from asset-backed to fiat, with the Dutch Florin, French Assignat, and English Pound all eventually giving way to the US Dollar (Seeking Alpha).

The Chinese Yuan seems to be next in line, but provided that all fiat currencies have been declining in value relative to gold, a commodity-backed alternative is particularly attractive. Thus, BRICS, an organization like the G7, only for emerging economies rather than developed, is potentially planning to introduce a currency designed specifically for international trade and backed by hard assets. The group which includes — Brazil, Russia, India, China, and South Africa — currently encompasses 26% of the world’s land, 41% of the world’s population, and 32% of the world’s GDP (slightly higher than the G7’s 31% of GDP). Many of these countries have recently ditched the US dollar for trade (China, Brazil, India, and France, to name a few).

Foreign countries are realizing that US dollar hegemony is no longer in their best interest, and the dollar is losing strength. BRICS wouldn’t have been able to challenge the US Dollar if we hadn’t been pushing it in that direction since the 1970s. We should get used to the idea that the US Dollar’s power may diminish over the next decade.

The Blockchain Economy is Still Denominated in USD.

Despite the macroeconomic, declining trend of the U.S. Dollar as the world’s reserve currency, the blockchain economy (or ‘crypto-economy’) is largely denominated in USD. Of the top ten stablecoins by market cap, nine are pegged to the U.S. Dollar and represent a USD $125 billion combined market capitalization, or 96% of the global stablecoin market.

What does this mean?

Nearly every blockchain based application and protocol likely supports USD-denomination and pushes their users to adopt American (at least financially) user experience design standards. However, due to regulatory indecisiveness and partisan gridlock, the United States is failing to capitalize on the current favorable position of the U.S. Dollar.

How do we fix it?

In order to keep blockchain talent in the U.S., bolster national GDP and tax revenues from increasingly successful, American companies, and maintain the U.S. Dollar’s dominance, American regulators must

• protect the development of decentralized financial applications;
• create multiple asset categories that sit between commodity and security designations for a variety of nuanced, digital assets to exist;
• minimize compliance registration costs (both in time via automation and in capital costs), and;
• instantiate use-case specific entrepreneurial programs to help realize the nation’s vision of its preferred, digital economy,

Regulation through enforcement may stifle innovation, but it will not disappear. Instead, it will adapt and thrive in other territories. As a result, the blockchain economy may no longer be denominated in USD, and the technology may surpass American financial and online commerce infrastructure. This could make our companies less globally competitive.

A U.S. CBDC Won’t Make USD Relevant

Amidst the recent, mid-sized banking crises, an increasingly politicized and ambiguous crypto-regulatory landscape, and a de-dollarizing world, the U.S. Federal Reserve has introduced FedNow.

FedNow is a real-time payment system that will allow individuals and businesses to instantly transfer money and make payments 24/7, 365 days a year, similar to existing systems such as Venmo or PayPal. The system is expected to be launched in 2023 or 2024 and aims to enhance the speed, safety, and accessibility of payments in the United States.

For FedNow to operate, there will need to be a U.S. Federal Reserve currency know as a U.S. Dollar Central Bank Digital Currency (CBDC). Similar to cryptocurrency, a U.S. CBDC would likely exist on a blockchain-like network that gave the Federal Reserve (and the U.S. government) complete transactional control and monitoring capabilities over USD transactions to the very last cent.

Regardless of one’s position on the utility or dangers of an autocratic, digital monetary policy within the United States (which is a whole topic on its own), the FedNow initiative misses the point:

The adoption of USD is a result of American hegemony, established through emerging market financing, soft power, and military might. The U.S. cannot pursue an international policy of economic sanctions and neocolonialism that overshadows the economic value it provides to the world. Otherwise, the world may turn away and put their trust in value outside the guise of American assets.

This is a stark and candid reality.

FedNow only seeks to digitize the U.S. Dollar and arguably remove American transactional freedom. The answer to a declining national currency is to make it easier to use within open financial infrastructure (i.e., through decentralized finance) that provides competitive financial services to foreigners who may not otherwise have access to them domestically. Simply put, as financial technology becomes increasingly peer-to-peer, the U.S. Dollar will need to provide retail and institutional advantages in exchange for its usage rather than just the military might of the Pentagon and pigeon-holding the world’s oil markets.

You Can’t Kill Blockchain Without Authoritarianism.

As fintech regulations evolve, there will inevitably be efforts to incorporate regulatory “backdoors” into the next generation of fintech applications. These backdoors would serve as safeguards to protect consumers in case of adverse scenarios, such as pausing or updating the financial system or application. In certain regions, obtaining a license or registration to operate legally may require having a regulatory backdoor.

Despite attempts to enforce regulatory restrictions, there will always be a non-regulated alternative available without a backdoor. Public blockchains like Bitcoin and Ethereum cannot be destroyed unless every computer supporting them globally is eliminated, making it impossible to enforce regulatory restrictions globally. Retail consumers commonly use Virtual Private Networks (VPNs) to bypass regional restrictions and access applications, products, and services that are not regulated within their domestic jurisdiction.

The combination of VPN usage and the near-impossibility of eliminating non-compliant blockchain networks means that regulation of blockchain-based applications will always be severely limited. Only extreme measures such as eliminating every computer supporting each identified network globally would enable a government to completely rid the world of non-compliant networks.

Blockchain Exists Because People Don’t Trust the Government & Banks

Rather than focusing on how to enforce regulation universally in the face of new technology, it’s important to understand why so many people are fervently embracing it. Recent polling by The Associated Press and the NORC Center for Public Affairs Research at the University of Chicago revealed that only 10% of US adults have high confidence in the nation’s banks and other financial institutions. Additionally, 48% of adults are concerned about the safety of their money in banks, with 19% being very worried and 29% being moderately worried.

Another poll conducted by the Pew Research Center in June 2022 found that only 2% of Americans trust the government in Washington to do what is right “just about always”, with 19% trusting the government “most of the time”. These findings indicate that most Americans lack trust in their government and traditional financial institutions to safeguard their money.

This lack of trust is what led to the creation of Bitcoin in the first place. Its anonymous founder(s), Nakamoto, claimed to be a thirty-six-year-old Japanese man who was partly driven by anger over the 2008 financial crisis. Nakamoto sought to create a currency that would be immune to unpredictable monetary policies and the greed of bankers and politicians.

If You Can’t Kill It, Influence It.

If lawmakers are unable to over-regulate or dispose of blockchain technology, the best strategy is to shape its development in a way that aligns with national aims and security. This can be achieved by supporting regulatory innovation, entrepreneurial sandboxes, and embracing a multi-digital dollar world that denominated in USD. Such demand, fueled by open-source and reasonably regulated software, will strengthen the dollar, increase treasury bond demand, and bolster sovereign financing, essential for building GDP and lowering debt.

It’s time to decide whether to allow other nations to surpass American innovation and economic prowess or to recognize that the global financial system is changing with or without the U.S. We need to act now to embrace this change and position ourselves to thrive in the future.