Why Middle Powers Will Leverage Bitcoin amid Growing Great Power Competition

Signs of a changing world order abound. 

Already this year, the leaders of Venezuela and Iran have been removed; regional conflict is growing in the Middle East; and China continues to flex its muscles in the Asia Pacific. Whether the unrest stems from economic and demographic cycles turning over or the return of great power competition, the long-term trend is clear: a new global paradigm is forming.

One area of significant change is the international monetary system. The U.S. passed the GENIUS Act regulating the use of stablecoins with rarely seen bipartisan support. In response, China is offering interest to holders of its central bank digital currency, the digital yuan (e-CNY), in an attempt to increase its usage and challenge dollar hegemony. The two great powers aim to leverage their respective digital tools to expand their economic influence abroad. Most notably, the actions of both countries bely a belief that there is a genuine competition after years of USD dominance in worldwide trade.

If you believe one side will definitively win that competition, and therefore the majority of international transactions will be settled in one currency, then no need to read further. I see that scenario as unlikely, however, given the frustration many countries have exhibited with the “exorbitant privilege” the U.S. has enjoyed for decades by owning the reserve currency. This privilege empowered America to both finance its deficit spending and use sanctions liberally. Nations are not inclined to simply hand that privilege over to China. But they are inclined to avoid monetary subjugation wherever possible.

While many countries will not have much of a say in the matter, “middle power” nations will have both the desire and the ability to avoid exclusive alignment with either USD or CNY systems. These middle powers have enough economic and military clout to exert influence regionally. In an ideal world, the middle powers would have access to both USD and CNY rails to preserve trade optionality but the freedom to keep their reserves denominated however they see fit. Maintaining a constructive relationship with these countries will be important enough to the U.S. and China that the two great powers will allow middle powers to operate in this manner, so long as there is an economic solution that permits it.

Independence will be at the core of middle powers’ monetary strategies, thus their reluctance to overly commit to either USD or CNY reserves. Therefore, they would need a system that allowed them to interoperate with dollars, yuan, and other middle powers’ currencies. For the sake of resilience though, that system could not be subject to the counterparty risk inherent with payments or credit processed through a company or another nation. Any sizeable transactions or reserve that can be frozen or seized by a foreign government, or a corporation pressured by a foreign government, would be deemed unacceptable.

It is a common assumption that gold will serve this role in the future, and understandably so. After all, gold served this purpose for several centuries prior to the beginning of the 20th century. After millennia in which gold was simply money, the world entered a period in which many countries existed on bimetallic systems that used silver for internal exchange and gold for international payments. Over time, this evolved into a gold standard system where nations issued their paper currency but used gold to settle balance of payments transnationally. (This is an oversimplified description of the dynamic for the sake of brevity, but for more information on this subject, see Battle for the Standard by Ted Wilson).

What ended this practice were two successive world wars during which countries were forced to surrender  gold over to allied custody rather than losing it to an invading enemy. Even after WWII, moving gold at scale internationally was considered too dangerous, despite a bifurcated global economic system during the Cold War. This led to complex bartering arrangements or bridge currency transactions through neutral countries like Austria and Finland, even though gold theoretically was ideal for acting as a neutral reserve asset.

The current closure of the Persian Gulf and the Red Sea as of the time of writing is a reminder that the security issue of transnational gold shipments remains perilous. Managing that risk requires complex logistics and massive insurance fees when moving gold cargos. Even if the gold is airlifted rather than sent via maritime routes, the pace of that settlement is too slow for a world with communication measured in milliseconds of latency. 

So why not use tokenized gold? While this option successfully solves the issues of transaction speed, as well as the logistical costs of moving physical gold, it reintroduces the problem of counterparty risk. The token issued to represent the gold is as good as the word of the custodian and its auditor. Furthermore, there is an inherited government-associated risk in addition to the issuer. Billions of dollars’ worth of stablecoins were frozen and/or seized last year at the request of several different governments. Why would tokenized gold not be subject to this same possibility?

So what are middle powers to do? Enter bitcoin. 

Bitcoin has carried the moniker of “digital gold” for years because it is both a store-of-value asset and a bearer instrument. While skeptics may argue with the former claim due to price volatility, the self-sovereignty properties of the digital asset are beyond dispute. Each day, tens of billions of dollars’ worth of bitcoin moves between individuals and institutions, and the network has operated without interruption for its 17-year history. 

Is it possible, though, that the comparison to gold will be even more apt due to bitcoin’s potential role in global trade? No other asset compares to bitcoin in its ability to process fast and frictionless transactions without the need to trust an intermediary. If one assumes that those are non-negotiable characteristics for middle powers settling balance of payments, bitcoin is the only option.

That is not to say that bitcoin is perfectly suited for the task today. The market cap of bitcoin needs to grow significantly to dampen the aforementioned volatility and provide enough liquidity for trade at scale. Furthermore, the concentration of bitcoin ownership in the West, specifically in the United States, might be cause for concern among some governments. Additionally, technological advancements around the Bitcoin protocol, like the Lightning Network, need to improve to increase confidence and functionality of transactions. Lastly, there are looming concerns about future quantum vulnerabilities.

But unlike other assets, there are ways to address these issues and therefore strengthen the use case of bitcoin in international trade. There is no roadmap to make stablecoins, central bank digital currencies, banking systems like SWIFT, or any other digital solution decentralized. Likewise, there is no hope to remove the friction that has existed in settling payments in gold, and gold settlement will likely become even more difficult with further world destabilization.  

None of this is to say that hyper-bitcoinization is imminent. Governments chose to issue their currencies because it was in their best interest, and they will not give up that practice willingly. The global community left the international gold standard, however, out of necessity. The bourgeoning monetary fight between the United States and China might be the catalyst for the next gold standard, but this one will be digital.