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The isolation of Russia by much of the world economy may or may not convince Vladimir Putin to recall his invading troops from Ukraine (probably not).
But it does mean pain for Russia’s people and its economy as the value of the ruble craters.
National currencies like the ruble have been the subject of much debate in recent years, particularly as technology like bitcoin has come to present a non-national alternative to the dollar.
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I talked to Eswar Prasad, who’s a professor at the Dyson School of Applied Economics and Management at Cornell University, a senior fellow at the Brookings Institution and the author of “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance,” about the sanctions on Russia and what it all means for money.
Our conversation, conducted by email and lightly edited, is below.
WHAT MATTERS: When we first discussed doing this Q&A it was to talk about cryptocurrency and your book “The Future of Money.” In the meantime, Russia has been partially isolated from the world economy for invading Ukraine and its currency has devalued. How does this episode factor into your thoughts on how the world will do business in the future?
PRASAD: The US and other Western economies have deployed a set of highly potent financial weapons against Russia with remarkable speed. Cutting off access to global financial markets and to a country’s war chest of foreign exchange reserves held in currencies of Western economies is a crippling blow for the Russian economy. This episode shows that, while the locus of global economic activity has been shifting eastward towards emerging market economies, the US dollar remains dominant in global finance.
Meanwhile, bitcoin and other cryptocurrencies appear to be entering the mainstream. Paradoxically, while bitcoin has failed in its stated purpose as a medium of exchange for conducting transactions, it has become a speculative financial asset.
Cryptocurrencies are unlikely to seriously challenge major fiat currencies such as the US dollar. But they are setting off an important revolution. New financial technologies, including bitcoin’s blockchain technology, could make it easier to create new financial products and services and give everyone, including low-income households, easy access to them.
Digital payments, both within and across countries, are becoming cheaper, easier and faster. This will benefit consumers and businesses, exporters and importers, and even economic migrants sending remittances back to their home countries.
WHAT MATTERS: One way Russia will try to find its way around sanctions is in bitcoin and other forms of cryptocurrency. How would that work?
PRASAD: Bitcoin and other cryptocurrencies do not yet provide the scalability to evade financial sanctions at the level of an entire economy, especially in view of the need to ultimately convert cryptocurrencies into more widely accepted global currencies to make international payments. In other words, the Russian government cannot count on bitcoin to evade sanctions – after all, payments for international transactions still need to be settled in real money such as dollars or euros. Furthermore, cryptocurrencies cannot in any significant way prevent a country’s currency from collapsing in value relative to major reserve currencies since those values are determined in formal financial markets.
Cryptocurrencies might in fact hurt Russia if they are seen by the country’s citizens as a better option than the plunging domestic currency. Thus, bitcoin might end up precipitating a flight of deposits from Russia’s banking system and even as a conduit for capital flight out of the country.
On a more positive note, Ukraine’s government seems to have been able to crowdsource foreign donations in cryptocurrencies, bypassing slower conventional channels.
WHAT MATTERS: Are there other reasons, besides patrolling bad actors like Russia, to regulate cryptocurrency? How should governments be acting now to regulate these new forms of currency?
PRASAD: Cryptocurrencies are rapidly entering the mainstream. Governments are rightly concerned that cryptocurrencies could be used to conduct illegal commerce and evade taxes, in addition to fueling speculation that could hurt investors and infect the rest of the financial system.
Cryptocurrencies have positive aspects, too. The blockchain technology underlying bitcoin is enabling the creation of new products and services that could one day revolutionize the way we conduct payments, banking and other transactions. The technology could make commercial transactions more efficient by cutting out inefficient intermediaries, not just banks but even attorneys and settlement agents. Variants of the technology could also make low-cost real-time digital payments, both within and across countries, easily accessible even to low-income individuals. This will benefit consumers, businesses, investors and even economic migrants sending remittances back to their home countries.
The US government has the opportunity to take the lead, if it acts fast, in setting standards for this industry and guiding international cooperation. It is also essential to make a push for digital and financial literacy that makes investors, who might get carried away by the technology, better aware of the risks. The industry itself will need to acknowledge various types of risks rather than wave them off and engage with regulators instead of merely offering to police itself. In fact, this might help the technology gain legitimacy and enable it to truly disrupt the existing financial system by fixing its many inefficiencies.
WHAT MATTERS: The US has an important reason to keep its focus on the dollar, since so much of our social safety net is funded by selling US debt. Would that be possible if the dollar were to be replaced by a more international currency?
PRASAD: International payments are certainly ripe for change. New financial technologies are making it easier to conduct financial transactions directly between pairs of emerging market currencies without involving an intermediating currency such as the US dollar. Directly exchanging Russian rubles, Indian rupees or Chinese renminbi for one another without the intermediate step of exchanging those currencies into or out of dollars will become easier. This means the dollar’s role as a payment currency in international transactions might become less important over time.
But the US dollar is likely to remain the world’s dominant reserve currency, the main global store of value. The US enjoys a powerful combination of advantages: It is the largest economy, has the deepest and most liquid financial markets, and boasts a strong institutional framework that encompasses an independent central bank, open and transparent government, an institutionalized system of checks and balances, and the rule of law.
China’s renminbi is often mentioned as a possible competitor to the dollar. Unless China is willing to drop restrictions on capital flows across its borders and the tight control it keeps over its currency, the renminbi will not become a major reserve currency. More importantly, private investors are unlikely to place their trust in a reserve currency that is not backed up by a robust institutional framework.
WHAT MATTERS: What’s the most important thing from your book that What Matters readers should know about the future of money?
PRASAD: The era of cash (physical currency) is drawing to an end. Digital payments have already become the norm in many developing as well as rich countries such as China and Sweden and they are rapidly displacing cash in other countries as well.
Meanwhile, national central banks around the world are looking to issue digital versions of their official currencies. China, Japan and Sweden are already experimenting with central bank digital currencies and a digital dollar is probably on the horizon as well. It is also likely that major corporations such as Amazon will someday begin issuing their own stablecoins, digital coins that are backed up by reserves of US dollars and can be used for payments within and across countries.
Many of these developments have been catalyzed by bitcoin’s blockchain technology, which will help in creating better digital payment systems, automating a broad range of transactions and helping to democratize finance. But we should be careful about giving free and unfettered rein to digital technologies. Otherwise, the result might be the erosion of confidentiality and perhaps greater intrusion of big business and governments in financial systems and in the functioning of society.