Cryptocurrency and related blockchain based applications have been gaining traction worldwide as the modern era progresses forward. While the technology has its critics, recent events like the Russia-Ukraine War have been interesting events for blockchain based applications.
Western nations have imposed unprecedented financial penalties, signaling a seismic geopolitical change that could lead many governments to adopt cryptocurrency, as evident in reaction to Russia's invasion of Ukraine.
International payments and national reserves have traditionally been regarded as state property in the modern age, and have been exempt from punitive sanctions while the United States was not at war. However, events in recent weeks have altered the landscape.
The US, EU, and their allies have shown a newfound willingness to weaponize the dollar-denominated global financial system, potentially leaving the world's smaller states out to dry, by imposing unprecedented sanctions, freezing Russia's foreign currency reserves, and halting international payments from Russian banks.
SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is the principal global messaging network for conducting transactions between banks. It is situated in Belgium. Because the system is so effective, many countries use it on a local level, which is why SWIFT receives over 42 million messages every day. SWIFT can trade any currency, but because more than 40% of its transactions are in dollars, it tends to support the dollar-based economy.
Thus prior to the new decade, in the 2010s some countries devised new plans to counter the SWIFT system.
In 2015, China introduced the Cross-Border Interbank Payment System (CIPS) to promote the yuan's worldwide use. As a trade war between the United States and China erupted during the Trump administration, Beijing connected international investments involving its $1 trillion Belt and Road Initiative to a vow to use CIPS. While only 3% of SWIFT payments contained yuan last year, the number of CIPS transactions climbed about 60%, and the value of CIPS transactions increased more than 80%, reaching 64 trillion yuan.
Later Russia introduced its own SWIFT competitor, the System for Transfer of Financial Messages, or SPFS, in 2017. It has been less widely adopted due to greater transaction costs and Russia's economy being one-tenth the size of China's. However, since Western sanctions were imposed, Moscow has extensively marketed SPFS use to critical trade partners who are also Western allies, such as India, Israel, and the United Arab Emirates.
The international oil and gas industry is worth almost $6 trillion, making around 7% of global GDP. This explains how nearly every domestic economy responds so sharply to shifts in the price of crude oil.
Since a 1970s agreement between the United States and Saudi Arabia - an arrangement that gave rise to the term "petrodollars" – oil and gas have been priced and quoted solely in US dollars. Since Russia's leverage is derived from its oil and gas exports, it has pressured European importers of its oil and gas to pay in rubles. Hungary is the only country so far that have agreed to it.
For years, China has been seeking to buy oil in yuan, and The Wall Street Journal reported last month that Saudi Arabia is seriously examining the proposition. This would be the most significant challenge to the dollar-denominated global system to date
Last month, Moscow stated that Russia and China had agreed to integrate CIPS and SPFS, and that transactions will begin to include digital rubles and yuan. According to reports, India has also agreed to build a new system with Russia
Unsurprisingly it would be an option seeked out by the less powerful states. As a result, the international financial system will be divided into two parts: SWIFT and non-SWIFT. They would no longer be at the mercy of global forces in terms of finances.
Businesses prefer to denominate their items in the currency in which they pay their expenses, which is typically the currency of the country in which they are based. For example, a US airline will price its tickets in USD — not because the dollar is the most stable currency, though it may be, but because it has agreed to pay employees and fuel costs in USD.
But what about the Dehli-based businessman who buys his U.S. airline tickets online in rupees? Regardless of the buyer's currency, the goods or services have been denominated in the currency chosen by the business, and its value is consequently tied to the US dollar.
This is precisely why firms are hesitant to commit to purchasing overseas goods in a foreign currency since they must then bear the currency's fluctuation risk. To mitigate this risk, many people purchase sophisticated financial instruments such as futures and swaps. To begin pricing in Bitcoin, organizations' costs must be denominated in the same currency.
El Salvador entered the fray last year, making bitcoin legal money. Ukraine made Bitcoin and a few other currencies eligible for payment last month. A major gas exporter, such as Venezuela or Qatar, adopting cryptocurrency and pricing some oil shipments in bitcoin might be the tipping point. Businesses are likely to begin pegging their goods and services to bitcoin if oil and gas can be denominated in cryptocurrency.
As countries realize that joining with either the dollar-based system or the Sino-Russian system exposes them to geopolitical winds, pressure is mounting.
Most people would be perplexed as to why the switch was made in the first place. It will only be worthwhile for customers to move away from dollarized payments when goods and services are denominated in crypto. Payments are immediate, and replacing these systems with stablecoins or some type of central bank digital currency (CBDC) tomorrow will most likely only provide marginal gains.
Following that, global economic participants will begin to see cryptocurrency as a legitimate unit of account for products and services, as well as possibly for everyday payments.
