Why Bitcoin is a perceived threat to the US dollar

The US dollar has been the world’s official reserve currency for several decades, yet many in the political sphere believe the rise of Bitcoin could end its global supremacy.

During a recent Congress hearing regarding Facebook’s digital currency project Libra, US Congressman Brad Sherman warned Bitcoin and other cryptocurrencies have the potential to threaten the US dollar’s dominance over the global financial system.

“Cryptocurrency either doesn’t work, in which case investors lose a lot of money, or it does achieve its objectives perhaps and displaces the US dollar or interferes with the US dollar being virtually the sole reserve currency in the world,” he said.

Sherman claimed the US dollar’s dominance over other currencies brings multiple benefits for Americans, such as profits generated by the Federal Reserve for the US Treasury and the ability to influence other countries’ policies and actions through the use of economic sanctions.

“We stand to lose all that because cryptocurrency is the currency of the crypto-patriot,” Sherman argued.

Beating the dollar’s monopoly

This isn’t the first time politicians have expressed concerns about the impact of Bitcoin on the US dollar. In a May 2018 interview with CNBC, St Louis Fed President James Bullard said while Bitcoin is not a threat at this point, “we don’t know how the future’s going to unfold”.

He added: “The dollar has been the winner historically because it’s backed by the largest economy and a relatively stable policy in terms of low inflation, and that’s going to be tough to beat. But a lot of people here want to beat it.”

Meanwhile, a Congressional report released at the end of 2013 warned that if greater use of Bitcoin and other cryptocurrencies leads to multiple monetary units, the stability offered by a single, incumbent currency (the US dollar) could be threatened, particularly if new currencies continue to exhibit high volatility.

The authors said that if Bitcoins are substituted for dollars on a systematic, long-term basis, it would decrease the need to hold dollars and increase the supply of fiat money. This could reduce the demand for dollars, which would affect the rate of circulation.

“In this case, for the Fed to maintain the same degree of monetary accommodation, it would need to undertake a compensating tightening of monetary policy,” the report said.

“At a minimum, a substantial use of Bitcoins could make the measurement of velocity more uncertain, and judging the appropriate stance of monetary policy uncertain.”

Crypto appeal grows

Although any potential threat to the US dollar looks a long way off, the substantial rise in Bitcoin’s value relative to the US dollar is likely to cause heightened concerns. Some analysts reckon the BTC/USD price could reach $100,000 by the end of 2021.

Several countries around the world have also made moves to shift away from the US dollar’s influence. Iran, for instance, recently launched its own cryptocurrency, and a group of several West African states plan to adopt a single fiat currency called the eco by 2020.

The biggest disruption to the US dollar’s influence, however, could be the issuance of a digital currency by a major central bank. If national digital currencies enable faster and cheaper international money transfers, they could be seen as realistic alternatives to the US dollar.

Viable alternative

Whether it is Bitcoin, a national digital currency, or another type of cryptocurrency, there is certainly a growing movement to replace a fiat-based, single-issuer global reserve currency with a sovereign-free, algorithm-based alternative. Many argue it would be more stable and trustworthy than the US dollar.

The main arguments against Bitcoin as an alternative are, firstly, a global currency needs to have a flexible supply and, secondly, Bitcoin is too volatile to become a universal settlement token for trading contracts. Some experts, however, argue Bitcoin’s volatility can be overcome by hedging exposure – and not necessarily against the US dollar, but against currency issued by a central bank directly on the Bitcoin blockchain.

At the moment, it seems unlikely that major businesses and governments will give up their preference for fiat, which gives them a degree of control. But as Bitcoin and other cryptocurrencies start to mature and gain wider acceptance, it’s easy to imagine a future in which the US dollar isn’t the world’s sole reserve currency.