The US dollar has maintained its status as the world’s leading reserve currency and the preferred medium for international trade and transactions for many years. However, this dominance is increasingly being challenged as geopolitical and economic shifts, along with concerns about the potential misuse of the dollar, prompt various nations to expedite their efforts to reduce reliance on the greenback.
The dollar’s overwhelming presence in the global economy is evident. While the United States constitutes about 25% of the world’s GDP, its currency dominates nearly 60% of global foreign exchange reserves, significantly surpassing the euro, its closest competitor. Nevertheless, this control is under growing scrutiny, with the strategic imposition of economic sanctions prompting some countries to explore alternative currencies, even as former President Donald Trump threatened substantial tariffs on those seeking to move away from the dollar.
In Russia, where access to the SWIFT payment system has been severely restricted due to sanctions, businesses have turned to cryptocurrencies as a workaround. Companies are increasingly relying on Bitcoin and other digital currencies for cross-border transactions. Although cryptocurrency was deemed illegal by Russia’s central bank in the past, recent regulatory changes have allowed corporations to adopt digital currencies since late last year. The country has now legalized the use of cryptocurrencies for international trade and has taken steps to permit Bitcoin mining.
Bitcoin’s Role in the Dedollarization Movement
Since its inception, Bitcoin has attracted advocates who promote “dedollarization,” a term that describes the movement toward diminishing the US dollar’s role as the primary global reserve currency. This concept encompasses a variety of financial activities, including oil and commodity transactions (often referred to as the petrodollar system), foreign exchange reserves, bilateral trade agreements, and investments in assets denominated in dollars. A recent paper from Andrew Peel, head of Digital Asset Markets at Morgan Stanley, highlights that the emergence of digital currencies could both challenge and reinforce the dollar’s dominance, potentially transforming the global currency landscape.
Despite the increasing popularity of digital assets, particularly stablecoins, expectations surrounding dedollarization in the crypto market may be premature. While Bitcoin is gaining recognition as a strategic reserve asset, experts warn that it is too early to label it as a genuine replacement for the US dollar. Countries like El Salvador have enthusiastically adopted Bitcoin, with the cryptocurrency now constituting approximately 15% to 20% of the nation’s total reserves. The US has contemplated similar initiatives, yet widespread acceptance remains limited, raising questions about whether such actions would undermine the dollar’s position rather than bolster it.
Brandon Mintz, CEO of Bitcoin Depot, stated, “For Bitcoin to truly rival the USD, it would necessitate broader mainstream acceptance, clearer regulatory frameworks, and more scalable infrastructure.” Presently, Bitcoin functions more as a hedge and a store of value rather than a direct substitute for the dollar, but its role could evolve as global financial conditions change. Mintz pointed out that factors like inflation and geopolitical tensions could heighten interest in Bitcoin. While institutional adoption and international usage are increasing, Mintz emphasized that it remains uncertain if Bitcoin can genuinely challenge the dollar’s dominance, as this will largely depend on how these trends unfold over time.
Challenges of Bitcoin’s Volatility
Despite its rising allure, Bitcoin’s volatility poses a considerable obstacle. The World Gold Council reports that Bitcoin experiences significantly higher volatility than gold and correlates more closely with Nasdaq technology stocks than traditional safe-haven assets. Eswar Prasad, a professor of trade at Cornell University, remarked, “Decentralized cryptocurrencies like Bitcoin remain highly volatile, making them unsuitable for use as mediums of exchange or reserve currencies.”
Decline of US Dollar in Global Reserves
Since the conclusion of World War II, the US dollar has held its ground as the leading global currency, accounting for approximately 88% of international trade transactions in 2024. Its status as the foremost currency is well-documented, with the International Monetary Fund reporting that by the third quarter of 2024, about 58% of central banks’ allocated reserves were held in US dollars, primarily in cash and US bonds. This figure significantly surpasses the euro, which holds around 20% of global foreign exchange reserves. However, despite the dollar’s ongoing dominance due to its reliability, broad acceptance in global trade and finance, and significance as a key reserve asset for central banks, indications suggest that its supremacy may be diminishing. The share of global foreign reserves allocated to dollars has dropped from over 70% in the early 2000s to below 60% today.
This decline became more pronounced after February 2022, when the US froze $300 billion of Russia’s liquid foreign exchange reserves located in the US and NATO nations. While many US allies supported this action, it sent shockwaves through global markets, underscoring the potential for the US to weaponize the dollar against not only adversaries but also allies whose policies diverge from American interests. An International Monetary Fund blog noted in 2024 that the imposition of financial sanctions has historically prompted central banks to modestly adjust their reserve portfolios away from currencies that might be subject to freezing, opting instead for gold, which can be stored domestically and is less vulnerable to sanctions.
Do Stablecoins Reinforce Dollar Dominance?
Although BRICS+ nations are attempting to diminish US dollar hegemony, the dollar’s value has remained resilient in recent years. The US Dollar Index has increased by approximately 8% over the past five years. In the cryptocurrency realm, stablecoins have emerged as some of the fastest-growing digital assets, often viewed as potential solutions for cross-border transactions. However, the majority of stablecoins are still pegged to the US dollar.
The current market capitalization of stablecoins stands at $233 billion, with US-pegged stablecoins like Tether’s USDT making up 97% of this sector, as reported by CoinGecko. This heavy reliance on USD-linked stablecoins indicates that instead of undermining dollar supremacy, digital currencies may actually bolster it. “With USD-linked stablecoins central to this digital ecosystem, we have a unique opportunity to extend US financial influence worldwide—if policymakers act promptly,” stated Cody Carbone, president of the Digital Chamber, a US-based blockchain advocacy organization, on X.
The rise of central bank digital currencies (CBDCs) could pose a threat to certain cryptocurrencies, particularly stablecoins, by offering efficient and low-cost digital payment alternatives. “A widely accessible digital dollar would diminish the necessity for privately issued stablecoins, although stablecoins from major corporations could still hold appeal,” Prasad noted. He further asserted that no credible alternative is currently positioned to displace the US dollar as the leading global reserve currency. “The dollar’s strengths lie not only in the depth and liquidity of US financial markets but also in the institutional framework that supports its status as a safe haven.”
This article is intended for informational purposes only and should not be construed as legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.
