Executives from several of the largest crypto exchanges testified before the House Financial Services Committee on Wednesday — ostensibly to discuss how digital assets could be vulnerable to fraud, manipulation and abuse. The hearing instead took a dramatic turn, as members of Congress focused on the waning role of the U.S. dollar.
The hearing called by committee Chair Maxine Waters was intended to help guide regulation to protect investors and preserve market integrity, concerns that have mounted as crypto markets have gyrated and scammers have made off with millions of dollars. But over the course of the four-hour hearing, a larger theme arose surrounding the threat decentralized cryptocurrencies pose to the dollar’s status as the global reserve currency.
Congressman Blaine Luetkemeyer of Missouri kicked off the discussion on this front. He cited the dominance of the U.S. dollar in foreign exchange markets as a key reason for its status as global reserve currency. Luetkemeyer went on to say that if the U.S. loses its status as the global reserve currency, “our economy, our whole country, our way of life is at risk.”
“I’ve said for a long time that the secular reduction in dollar holdings as a percentage of global central bank holdings is alarming, and this has been going on for more than 10 years at this point,” said Brian Brooks, CEO of Bitfury Group. The European Central Bank and Bank of Japan each reduced their holdings of U.S. dollars from around 80% to 60% of total reserves, according to Brooks, who was the acting comptroller of the Currency until January. IMF data from the end of 2020 showed that the share of U.S. dollar held by central banks had reached its lowest level in 25 years, at around 59%.
Jeremy Allaire, the CEO and co-founder of Circle, called maintaining the U.S. dollar’s global reserve status “not just a national economic priority, a national security priority.” Circle backs a dollar-linked stablecoin, the USD Coin or USDC.
While everyone at the hearing seemed to agree on the problem, coherent solutions didn’t emerge from the conversation. The cryptocurrency executives predictably suggested various fixes that involved the U.S. government embracing private companies in their sector.
“Partnering closely with private companies and using open internet technologies becomes a way for the United States to compete versus states that are seeking to nationalize that infrastructure [and] operate it themselves in a surveillance-oriented model,” Allaire said.
That was a reference to China, which has banned decentralized cryptocurrencies and introduced its own digital yuan. China wants its digital yuan, also known as the e-CNY, to become a global reserve currency, and is working with Thailand and the UAE on a project to lower cross-border central bank payment costs with central bank digital currencies. U.S. politicians have expressed concerns that a digital yuan would give China immense surveillance capabilities, though Chinese officials have insisted that the system affords some anonymity.
Bitfury’s Brooks took a slightly different angle, suggesting that competition from decentralized cryptocurrencies could help “shore up our monetary policy and keep the dollar where it rightfully ought to be, which is as the dominant reserve currency it’s been for all of our lives.”
Brooks also said the U.S. wouldn’t be able to take the primacy of the dollar for granted in the future, and that it would instead have to compete on utility and features — something a shift to internet-enabled dollars would allow.
“There will come a time — gradually, then suddenly — when the attractiveness of the dollar relative to other currencies could change,” he said.
This stance isn’t likely to win over those concerned about the threat posed by cryptocurrencies toward the dollar: Why compete on a “free market” of digital currencies when the U.S. dollar still reigns supreme?
Crypto enthusiasts insist the cat is already out of the bag. They argue the U.S. would be better off embracing innovation rather than unsuccessfully trying to stifle it. The popularity of dollar-linked stablecoins could well cement the dollar’s role instead of eroding it, for example.
Another school of thought, however, would say this is a naive view — that the U.S. dollar doesn’t reign supreme because of technology and “features,” but because of all the other ways the U.S. exerts power over the rest of the world.