Crypto Currencies Trying To Undermine Global Financial System

27 Jan 2025

Crypto Currencies Trying To Undermine Global Financial System
Background Image Source: pexels Merged Image Source: Gage Skidmore from Surprise, AZ, United States of America, CC BY-SA 2.0, via Wikimedia Commons
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US President Donald Trump, it seems, is the latest to join the frenzy for personal or corporate currency, with $TRUMP, or what they call a meme coin, giving a further boost to his crypto image. 

A day before, Indian tycoon Mukesh Ambani’s Reliance Jio came out with a crypto token, called JioCoin that many observers see as a step towards the cryptocurrency space.

The $TRUMP token, launched a day after Trump took oath as President, hopes to leverage on the strength of his office.

But what Trump or Ambani adds to the financial value chain is difficult to decipher.

They call it Crypto, Doge, Meme or just token, but the fake monies act as if they are enriching the global financial markets and the global economy by their mere presence. Try following one of the oldest and most talked about among the fake currencies, Bitcoin, which claims its value in several thousand times that of the US dollar, which itself is the strongest among all legal currencies in circulation.

These floating currencies owe their origin to the internet and can also be highly volatile, and as disparate as the opinions expressed by social media addicts about persons, objects or incidents, which make them ideal media for speculation.

By posing as an investment option and a medium for transactions, these web currencies are trying to gain legal status, even as they survive on herd mentality.

In one way, crypto currencies are meant to hijack the idea of a global currency that would replace the dollar or the euro by posing new challenges to the global financial system.

A Global Currency

There is an urgent need for a global currency that would truly reflect the inherent values of currencies of individual nations. This could only be done by introducing a new medium or realigning the value of the International Monetary Fund’s Special Drawing Rights (SDR) that currently considers the US dollar, the European common currency euro, the Chinese renminbi, the Japanese yen, and the British pound sterling as currencies.

SDRs that countries use as supplementary foreign exchange reserve asset represent a claim for which they may be exchanged against these currencies, but mainly against the dollar. 

The SDR was created as a supplementary reserve asset in 1969, when currencies were linked to gold, but priced in the US dollar. It was then equivalent to one dollar and continued to move with dollar parity to other currencies.

And, when fixed exchange rates ended in 1973, the IMF pegged the value of the SDR to the value of a basket of currencies. IMF undertakes a periodic review of the SDR value based on the weighted average of the five currencies.

As per the 2022 review of the SDR, its value has a weight of 43.38 against the dollar, 29.31 against the euro, 12.28 against the Chinese renminbi, 7.59 against the Japanese Yen and 7.44 per cent against the Pound Sterling.

As of today (26 January 2025) one SDR is equivalent to 0.0000000007 bitcoin or one bitcoin can buy 80,611.56 SDRs.

Now think of linking these fake currencies to legal tender, which could spell the end of an orderly global financial system by making all financial transactions risky. 

These tokens with attached values of thousands of dollars or euros also represent a threat to national security for countries, as enemies holding these currencies could buy or sell them off, leading to a spike in values or a crash.

The fact is that the developed world is against the idea of a universal currency, which, they consider as a threat to their hegemony. As the pricing shifts from dollar to a new common currency, product pricing will become more open, which could thwart financial engineering of currencies.

The Alternative

The US policy of constantly rigging up dollar value through market mechanics like the pricing of gold and crude oil, has pushed countries towards alternative currencies and new mechanisms to realise price parity of their currencies.

Countries are also trying to limit dollar holdings as the rising price of dollar results in lost purchasing power for the domestic currencies.

It is this that prompted the BRICS countries to push for a common currency alternative to the US dollar.

It may be noted that the dollar has succeeded in preserving or even gaining value in spite of a $1.2 trillion addition to the Federal Reserve’s balance sheet since the 2008 global financial crisis.

The Fed’s balance sheet was boosted by successive US federal budget deficits that are expected to peak to $1.83 trillion or 6.4 per cent of GDP in 2024, up from 6.3 per cent in 2023.

While any unwinding of the substantial federal budget deficit will be challenging, it need not result in any dollar depreciation or inflation, if we are to go by the dollar pricing mechanism and past experience, like the one in the 1980s.

The alternative lies in creating new power currencies that would better serve the international financial system and the global economy. But this is hardly done than said and would require constant efforts at creating regional trading blocks that could do away with any hard currency medium.

Local currency trading is a limited option in an interconnected world and can only be done within a closed circuit of interdependent economies. 

While political, economic, and logistical challenges would make global currency a distant dream, nations can still work towards a more acceptable global financial order where each currency can find its real value.

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