Just Stop. De-Dollarization Is Impossible

I often forget I’m getting older.

I’m fortunate in many ways, not least of which is that, for the most part, I look a lot like I did a decade ago, and because I’ve spent the vast majority of that period isolated from the rest of humanity, it feels like time stopped in 2012. That’s four years prior to the advent of this site, which speaks to the fact that, contrary to what many people who know me believe, 2015 wasn’t an epoch-making moment in my life. For that story, you’ll need to consult a Tinker Bell-esque thirtysomething with the heart and dagger tattoo from The Rocky Horror Picture Show on one of her shoulders (I’ve forgotten which one).

Not noticing the passage of time sometimes leaves me bemused when some development makes old stories new again. “Has everyone forgotten the last time we had this discussion?”, I’ll ask, aloud, to nobody.

The answer is “No.” It’s not that people have forgotten. It’s that many market participants weren’t market participants the last time a given story had any real traction, or if they were, they weren’t operating in a capacity that would’ve required them to ponder the intersection of macro dynamics and geopolitical cross-currents.

Over the weekend, I talked at length about the fabled petroyuan and also about crypto. The tie that binds is de-dollarization. Every few years, events conspire to thrust the de-dollarization debate back above the fold, and about once every five years, the discussion is a modicum of serious, commensurate with some geopolitical shift that seems tectonic in the moment.

Read more: The Petroyuan And ApeCoin: Fables Of The Dollar Deconstruction

Bitcoin proponents and, more recently, crypto adherents in general, think this debate is new — that digital transactions recorded on a public ledger “sparked” a discussion about the dollar’s reserve currency status. Similarly, some folks on Wall Street appear to believe the West’s decision to freeze Russia’s hard currency reserves marked the first time anyone’s seriously considered diversifying away from USD assets in order to avoid losing a war before it even starts. (And make no mistake, that’s what happened over the last three weeks. Russia is finished, and the US never had to fire a shot. Or maybe I should say the US never had to pull any triggers itself. Putin has no options for winning. He does have an option to make it a draw, but that option is nuclear weapons.)

The fact is, this debate is almost as old as Pax Americana itself, an irony considering the dollar was at the center of what we unironically describe as a “long peace” (a “peace” defined by multiple wars involving the ostensible peacekeeper). De-dollarization remains a glacial process.

The figure (above) illustrates just how absurd this debate really is. The yuan’s “inroads” don’t even amount to a hash mark on the y-axis. Barring some manner of complete societal breakdown, wholesale de-dollarization is impossible.

Let me just dispense with crypto right away, because that’s the easy part. You can’t do anything with crypto. Sure, you may be able to buy an exotic car with Bitcoin because some new hire in PR convinces a mid-level executive it’d be a good publicity stunt. And you can probably find a mansion for sale in Bitcoin because the person who bought it before you was an early adopter. But generally speaking, you can’t use it. You can’t go to Kroger and buy a cart full of groceries in Solana. Nor can you rent an apartment in Avalanche. Nor can you pay property taxes in Polygon. And you damn sure can’t pay the IRS in ApeCoin, even though you may well owe the government quite a few real dollars based on your ApeCoin windfall.

Beyond that, I don’t think it occurs to regular people how absolutely ridiculous some aspects of on-chain transactions really are. Consider the passage (below) from an official MetaMask support forum:

The Ethereum network requires gas to execute transactions. When you send tokens, interact with a contract, send ETH, or do anything else on the blockchain, you must pay for that computation. That payment is calculated in gas, and gas is always paid in ETH.

You are paying for the computation, regardless of whether your transaction succeeds or fails. Even if it fails, the miners must validate and execute your transaction, which takes computational power. You must pay for that computation, just like you would pay for a successful transaction.

As some readers may be aware, gas fees can be exorbitant on Ethereum Mainnet. Imagine your Visa card is declined for an ice cream due to a problem not related to your account balance. In other words: The transaction fails, but not because you had insufficient funds. Now imagine that failure costs you $100. Oh, you can’t imagine that? Me neither. Which is why Ethereum isn’t Visa.

I could go on, but I think that’ll suffice for now.

Outside of crypto, the issues are myriad. Most obviously, the dollar is simply too dominant. The figure (below) shows why the dollar can’t be supplanted near-term. Global trade, lending and commerce would grind to a standstill. Colloquially speaking: Nobody, anywhere would be able to get much done.

Note that the reference dates for the visual are 2019 and 2020. All of the relevant data is publicly available, but not all of the necessary figures are easy to locate and verify expeditiously. Also, some of the ratios may have been distorted by the pandemic. So, in order to get something like a reliable snapshot without spending all day on one chart, I typically default to a June 2020 BIS paper prepared by a working group chaired by Sally Davies and Christopher Kent. It’s not perfect, and it’s not “current” strictly speaking, but it serves its purpose.

On most metrics, the euro is Robin to the dollar’s Batman, and as long as the US and Europe are allies, that means replacing the current system is a literal impossibility. We’re talking not about choices, and not about preferences. It’s not about what’s ideal. Rather, we’re talking about the way the world works. This is the plumbing system. There’s no backup. So, if you want to replace it, you’d need to be prepared to go without running water for however long the job takes. And it could take decades.

“Fundamentally, we do not expect a significant drop in Treasury demand from reserve managers as a group in the near-term given the need to recycle current account surpluses in the capital account and the absence of a credible alternative,” Goldman’s Praveen Korapaty said Friday.

As Mark Mobius told Bloomberg, there are “no other options at this stage in the game.” In fact, he mused, the dollar “will probably get stronger if tensions continue to escalate.” In the figure (above), the “FX transaction volume” column is almost 90% “tall.” “Here’s the deal,” as Joe Biden would put it: The dollar is on one side of 88% of all global FX trades totaling almost $7 trillion per day. According to the BIS, the euro was on one side of 32% of trades.

A strategist who spoke to Bloomberg for the same linked article delivered a succinct take which should (but never does) resonate with those who insist on some version of a de-dollarization narrative. People can’t pay at scale with gold, nor can they pay at anything even remotely like scale with crypto. “At the start and the end of the chain are dollars,” that person remarked.

That point can’t be emphasized enough, even as it’s perpetually lost on what I have to think is a sizable majority of crypto investors. Over the past 48 hours, at least a half-dozen Bored Ape Yacht Club owners who, by virtue of their NFT holdings, were granted a free ApeCoin allocation, posted screenshots of withdrawal confirmations from their Coinbase accounts (not the best idea if you haven’t incorporated yourself and you don’t enjoy paying taxes). Every one of those social media posts featured some version of a “Thank you BAYC” message, typically with an additional love letter about how the windfall was “life changing.”

Of course, the whole episode (which, in my opinion, could eventually be the subject of some kind of official inquiry) only became “life changing” once the coins were converted to dollars and the dollar-denominated withdrawal confirmed in Coinbase, the last step in safely extracting your crypto windfall from The Matrix.

At the beginning of that adventure were dollars. At some point, dollars needed to be exchanged either directly for Ether, or for something else that was eventually exchanged for Ether, because Ether was necessary to buy the NFT. The liquidity event was an airdrop of a new Ether-based token, which was then moved off chain, back to Coinbase and then converted to real dollars, on the way to a safe landing place in a real, dollar-denominated bank account.

So, like the majority of transactions that take place around the world every day, “At the start and the end of the chain are dollars,” to quote the strategist who spoke to Bloomberg again. In the case of crypto transactions, that assessment is true right down to the word “chain.”