The Washington PostDemocracy Dies in Darkness

The dollar provides the U.S. with enormous power. Will new payment technologies change that?

Europe and China will both find it hard to escape the dollar

(Elliott & Thompson)

Gottfried Leibbrandt and Natasha de Terán have a new book, “The Pay Off: How Changing the Way We Pay Changes Everything,” explaining why global payment systems are important — and how they are changing. I asked them four questions by email about the politics of payments.

Q: Global payment systems have recently become a lot more politicized than they used to be. Why is that so?

A: Payments have always been political, but their recent politicization is far more visible, systematic and effective thanks to our economic interconnectedness. The world has become more politicized as we have moved from “the end of history” with the fall of the Berlin Wall and the dawn of Ian Bremmer’s “G-Zero” world. What is somewhat perverse is that the emergence of Bremmer’s power vacuum has coincided with the U.S. asserting leadership by “weaponizing” payment systems. The increasing globalization of payments, their systems, platforms and networks, has allowed the home governments of large payment firms to exert extraterritorial influence, and it just so happens that most of the protagonists in international payments are … American. The U.S. has thus found payments systems, and the financial system in general, a useful tool to combat crime and to enforce foreign policy. Everyone should welcome the effort to fight crime, financial crime and tax fraud, but the line between financial crime and foreign policy can be less than clear-cut, as we saw when three U.S. payment giants — PayPal, Visa and Mastercard — all cut WikiLeaks’ access to payments.

Q: You say that “banks in other countries have to comply with U.S. sanctions when they are handling payments that don’t go anywhere near the U.S.” Why do foreign banks have to care about U.S. sanctions?

A: This is because of the crucial role of the dollar in the world economy. The dollar plays a crucial role in payments, where it denominates close to half of all cross-border activity, as well as the lion’s share of securities and derivatives settlements and foreign exchange trades. It is because of this dollar dominance that no bank can afford to lose access to the U.S. payment system. If overseas banks do not comply with U.S. sanctions, the U.S. can simply forbid its banks to process dollar transactions for them. The dollar gives the U.S. leverage.

The status of the U.S. dollar as the world’s reserve currency can of course be challenged, but for the moment it rests on several pillars: the size and resilience of the U.S. economy, still the largest in the world; its deep and liquid capital markets, including its government debt (still the investment of choice for the likes of China); its military might; and finally the simple fact that most global trade and commodities like oil are denominated in dollars: The U.S. dollar is the lingua franca of the global economy.

Q: Your book describes how the European Union tried to work around President Donald Trump’s Iran sanctions and failed. What options does the E.U. have if it wants to resist in future?

A: Europe’s options are limited because its banks (and large firms) are beholden to the U.S. dollar and therefore have to comply with U.S. sanctions. It is difficult even for smaller European firms to bypass banks or the long arm of U.S. law — take the example of a small European supplier needing payment from Iran. The supplier would want to deposit this cash with its bank, which would have to ask about its provenance and either refuse to bank the money or face exclusion from the dollar clearing system. The likes of bitcoin don’t help here. If Iran paid the supplier in bitcoin, the European firm would have to convert bitcoin into euros, which banks would refuse to do. Alternatively (you could argue), the firm could pay its employees or suppliers in bitcoin, but they too would (perhaps or presumably) want to convert them into euros at some point, when they would face the same problem.

Were the euro to attract more reserve deposits and more international trade and foreign exchange transactions, that could change. But this wouldn’t just require deep capital markets, confidence; it also presupposes that firms and investors will be willing to lose the benefits of the deep liquidity in U.S.-dollar currency conversions and hedging markets.

Q: There is a lot of speculation that China’s new digital yuan project is intended to displace the U.S. dollar as the dominant international currency. Is that speculation justified or not?

A: The Europeans have been quite verbal about their ambitions, the Chinese less so. We can’t read the intentions behind the eYuan, but we can speculate whether an eYuan could displace the dollar. To do so, it would have to clear quite a few hurdles. In the first place, the yuan would have to dramatically increase its share in global trade from the current 1.4 percent (vs. 42 percent for the dollar). This in turn would require significant progress in the depth of China’s financial system and capital markets and increased investor confidence in them. It would also require the elimination, or at least lowering, of current barriers to yuan convertibility. It is unclear how the eYuan would contribute to this unless the Chinese government were to allow free convertibility for eYuan. Conceivably, the eYuan could start to circulate in the economies of some of China’s (more susceptible) trading partners, much like physical U.S. dollars have long circulated in parts of Latin America. Even then, it would have to gain widespread consumer acceptance, which is no mean feat, given the convenience, low cost and ubiquity of Alipay and Tenpay. And therein (perhaps) lies the most interesting rub, not only for China but also for the U.S. and Europe: Can technology “do” payments better than banks and traditional currencies and, if so, what will that mean for their positions and ambitions?