Why Bitcoin can’t pose a threat to the global order, according to new research

A new study published by academics at the University of Missouri argues that cryptocurrencies like Bitcoin are less of a threat to the international political and economic status quo than previously thought.

Cryptocurrencies were once heralded as a way to disrupt the world’s financial systems. But according to researchers Heather-Leigh Ba and Ömer Faruk Şen, crypto doesn’t really pose a threat to the global political economy, as countries opposed to US dominance are also more likely to ban it.

The study, published in scholarly journal Review of International Political Economy on March 15, looked at what factors influence a country’s decision to ban or limit its citizen’s access to cryptocurrency.

“Our cross-national analysis does not find a statistically significant relationship between currency crises and the likelihood of governments enacting cryptocurrency bans,” Şen told DL News. “This suggests that national cryptocurrency regulations do not appear to be motivated by a country’s recent experiences with currency crises.”

Instead, they found that countries with more stringent economic controls were more likely to restrict or ban cryptocurrencies because they pose a threat to their economic stability.

But it’s these countries that many thought could use crypto as a way to gain an edge against the world’s leading economies, namely the US.

“America’s greatest rivals, those countries that might be inclined to promote crypto as a way of undermining American financial and monetary power, are autocratic and employ exchange rate and capital controls,” the study said. “They are thus constrained in their ability to promote cryptocurrency for these ends.”

With this being the case, greater global crypto adoption should weaken such smaller economies who cannot or will not adopt it.

At the same time, crypto may do little to disrupt the US’ position as the dominant world monetary power. Certain cryptocurrencies, such as US dollar stablecoins, may even help bolster the US’ monetary power.

“Our results suggest that cryptocurrency threatens the international political and economic status quo less than many speculate because regimes most likely to be at odds with US monetary and financial dominance face a strong incentive to ban the technologies in their own countries,” the study said.

How crypto hurts some economies

Co-authors of the study, Ba and Şen, identified three factors that might make a country more likely to ban or restrict crypto use: countries that fix their currency’s exchange rate, those with authoritarian regimes, and those that impose capital controls on their citizens.

Capital controls are actions taken by a government to limit the flow of capital in and out of an economy. Cryptocurrencies allow users to send funds permissionlessly across borders and can easily bypass such controls. Crypto can also bypass official fixed exchange rates, impacting the value of a country’s native currency.

The authors hypothesised that countries that are more authoritarian, or those that impose a fixed currency exchange rate or capital controls, are more likely to ban crypto, while countries that do not will have less incentive to ban them.

The results support their idea. They found that countries with such economic controls were more likely to ban or restrict crypto use.

The authors found that the evidence suggests decisions to regulate crypto are “largely motivated by governments’ very practical concerns over monetary and political control,” and not its potential to disrupt the current financial system.

“Concerns about the threat of cryptocurrency to US dollar hegemony and financial power are exaggerated,” the authors said.

Stablecoins boost US monetary power

In addition to negatively impacting countries that might otherwise promote cryptocurrencies to undermine American financial power, they may also help boost US dollar dominance.

One way in which they do so is through US dollar stablecoins — cryptocurrencies pegged to the US dollar. Demand for such stablecoins is growing, especially in countries with unstable economies like Argentina and Türkiye.

Ba told DL News that stablecoins can boost US monetary power similarly to off-shore dollar markets — where non-US residents use the US dollar to settle trade and make investments, without going through the US financial system.

Examples of such markets are commonplace in countries with ailing economies. In Argentina, which has suffered from 211% inflation of the Argentine Peso in 2023, many turn to informal currency markets where they can buy what they call “blue dollars” — US greenbacks — for almost three times the official rate.

Lebanon, another country rocked by high inflation, has similar markets, many of which rely on Tether’s USDT stablecoin.

These countries also register higher than average levels of crypto adoption. According to Şen, such crypto adoption is a symptom of financial mismanagement.

The existence of these markets is only a good thing for the US, Ba said. “US monetary power does boil down to supply and demand for the US dollar, which logically would mean stablecoins contribute to US monetary power.”

With economies that might otherwise use cryptocurrencies to challenge the US banning them, and stablecoins helping to solidify the US dollar’s status as the world reserve currency, crypto is looking less and less like the disruptor many thought it would be.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.