The Dollar Vs. Digital Assets: Is Washington Undermining Its Own Currency?

Elliott Management, one of the world’s most influential hedge funds, has raised concerns that the White House’s economic policies are inflating a dollar bubble that could "wreak havoc" on global markets. At the same time, Washington has shown increasing support for digital assets, including blockchain technology and central bank digital currencies (CBDCs).

This raises a fundamental question: Is the U.S. government inadvertently weakening its own currency by encouraging financial innovations that could challenge the dollar’s dominance? As cryptocurrencies, decentralized finance (DeFi), and digital currencies gain traction, the long-standing supremacy of the U.S. dollar in global trade and finance is facing its biggest challenge in decades.

The Dollar’s Role in Global Finance

Historical Dominance

For decades, the U.S. dollar has been the world’s primary reserve currency, a status solidified by the Bretton Woods Agreement in 1944 and reinforced by the petrodollar system in the 1970s. The dollar's dominance has provided the U.S. with significant economic advantages, including:

• Lower borrowing costs due to global demand for U.S. debt.
• The ability to impose economic sanctions with far-reaching effects.
• A deep and liquid financial system that attracts global investment.

Current Importance

Today, the dollar accounts for nearly 60% of global foreign exchange reserves, according to the International Monetary Fund (IMF). It is also the primary currency used in international trade, particularly for commodities such as oil, gold, and natural gas.

However, the dollar’s position is not unquestionable. Several factors, including rising U.S. debt, inflation, and geopolitical tensions, have raised concerns about the currency’s long-term stability.

Threats to Dollar Stability

• Inflationary Pressures – The Federal Reserve’s aggressive monetary policies have led to fears of inflation undermining the dollar’s purchasing power.
• Ballooning National Debt – The U.S. national debt exceeds $34 trillion, raising concerns about the sustainability of dollar-backed government securities.
• Geopolitical Shifts – Countries like China and Russia are actively reducing their reliance on the dollar by increasing trade in other currencies.

Amid these concerns, the rise of digital assets presents an additional threat to the dollar’s global dominance.

The Rise of Digital Assets and Their Impact on the Dollar

Cryptocurrencies: A New Financial System?

Cryptocurrencies like Bitcoin and Ethereum have positioned themselves as decentralized alternatives to traditional fiat currencies. Key characteristics of cryptocurrencies that challenge the dollar include:

• Fixed Supply – Unlike fiat currencies, Bitcoin has a capped supply of 21 million coins, preventing inflationary devaluation.
• Borderless Transactions – Cryptocurrencies enable instant, low-cost global transactions without intermediaries.
• Decentralization – No single government or institution controls Bitcoin, making it resistant to monetary policy manipulation.

CBDCs: A New Threat or an Opportunity?

Several countries, including China, the European Union, and India, are actively developing central bank digital currencies (CBDCs) to modernize their monetary systems.

• China’s Digital Yuan (e-CNY) is already in use in domestic transactions and international trade, reducing dependency on the dollar.
• The European Central Bank (ECB) is accelerating efforts for a Digital Euro as an alternative to dollar-based transactions.

If widely adopted, CBDCs could enable more direct international trade, bypassing traditional dollar-based payment systems such as SWIFT, further eroding dollar supremacy.

The Growth of Decentralized Finance (DeFi)

DeFi platforms, which operate without traditional banks, are gaining popularity, offering lending, borrowing, and trading services without fiat currency involvement. If DeFi continues to expand, it could reduce global reliance on traditional banking systems backed by the dollar.

The White House’s Position on Digital Assets

Regulatory Stance: Uncertainty and Contradictions

The U.S. government’s approach to digital assets has been inconsistent. On one hand, regulatory agencies like the Securities and Exchange Commission (SEC) have cracked down on cryptocurrency firms, citing concerns over fraud, volatility, and systemic risks. On the other hand, the Federal Reserve and other agencies have shown growing interest in blockchain technology for financial innovation.

Encouraging Financial Innovation?

• The Biden Administration’s executive orders have called for responsible development of digital assets, including research into a U.S. CBDC.
• The Treasury Department has explored blockchain applications for cross-border payments and financial efficiency.
• The Federal Reserve has discussed the potential benefits of stablecoins, a digital asset class pegged to fiat currencies like the dollar.

While these efforts aim to modernize the financial system, they also risk promoting alternatives that reduce reliance on traditional dollar-based banking.

Mixed Messaging: Strengthening or Weakening the Dollar?

The White House faces a policy dilemma:

• Supporting digital asset innovation could drive economic growth and technological leadership.
• However, excessive adoption of non-dollar digital assets could lead to capital outflows and a diminished role for the U.S. in global finance.

Elliott’s Warning: A ‘Dangerous’ Shift Away from the Dollar

Elliott Management has warned that the U.S. government is failing to recognize the long-term risks of digital assets. Their key concerns include:

• Potential capital flight as investors move from the dollar to decentralized assets.
• Loss of monetary control if decentralized finance (DeFi) reduces reliance on central banks.
• A shift in global trade patterns if countries start favoring digital currencies over dollar settlements.

Lessons from History: Could the Dollar Lose Its Status?

• British Pound Decline (20th Century): The pound sterling was once the world’s dominant reserve currency but was overtaken by the U.S. dollar after World War II due to economic decline.
• Gold Standard Collapse (1971): The shift from a gold-backed currency to fiat money led to currency volatility and inflation risks.
• Rise of the Euro: The introduction of the Euro in 1999 challenged the dollar but never fully replaced it.

The question remains: Will digital assets play a similar role in reducing dollar dominance over time?

Future Scenarios: What Happens Next?

Scenario 1: The Dollar Remains Dominant

• The U.S. successfully regulates and integrates digital assets while maintaining dollar hegemony.
• The Federal Reserve develops a CBDC that enhances the dollar’s role in digital transactions.

Scenario 2: The Dollar Weakens

• Cryptocurrencies, stablecoins, and CBDCs erode trust in fiat currency.
• More global transactions shift to non-dollar assets, reducing demand for U.S. debt.

Scenario 3: A New Global Currency Order

• The world moves toward a multipolar financial system, where no single currency dominates.
• Nations and corporations bypass the dollar in international trade using digital assets.

Conclusion

The rise of digital assets presents both opportunities and risks for the U.S. economy. While blockchain innovation can enhance financial efficiency, uncontrolled adoption of decentralized assets could threaten the dollar’s global dominance.

Elliott Management’s warning is clear: if Washington does not carefully balance financial innovation with currency stability, the U.S. could accelerate its own economic decline. The future of the dollar depends on how policymakers navigate this complex and rapidly evolving landscape.

Author: Ricardo Goulart