Bitcoin Struggles as USD Dominates Global Transactions

Bitcoin emerged in 2009 as not just an innovative technology, but also as a financial proposition — one that promised to shake the very foundations of traditional fiat currency systems and offer a compelling alternative to the universal reign of the U.S. dollar in international finance. Proponents lauded Bitcoin as the torchbearer of de-dollarization, envisioning a future where the decentralized cryptocurrency would reduce the world’s reliance on the USD for global transactions. Recent trends suggest that the de-dollarization narrative faces significant challenges as the USD continues to tighten its grip on the sphere of international commerce.

At first glance, Bitcoin’s attributes make it a strong candidate for international trade. As a decentralized and borderless currency, Bitcoin bypasses the need for traditional banking systems and foreign exchange markets. Its underlying blockchain technology ensures secure and transparent transactions, theoretically simplifying and expediting cross-border payments, which are often bogged down by bureaucratic entanglements and fees in the existing financial infrastructure dominated by the dollar.

Early victories for Bitcoin enthusiasts included small-scale international transactions and remittances where Bitcoin proved more efficient and cost-effective compared to traditional banking services. As adoption spread, there was a burgeoning belief that Bitcoin could start chipping away at the dollar’s hegemony. During periods of geopolitical instability or when sanctions come into play, Bitcoin has been seen as an alternative mechanism to conduct international transactions, ostensibly immune to the geopolitical influences that can heavily impact fiat currencies, particularly the USD.

Despite Bitcoin’s promise and the growing interest in cryptocurrency, several factors appear to be reinforcing the USD’s dominance rather than diminishing it. The first factor is Bitcoin’s notorious volatility. While a degree of fluctuation is expected among currencies, the scale of Bitcoin’s price swings undermines its reliability as a vessel for storing value or pricing goods and services. Companies engaging in international trade require stability to forecast budgets, manage cash flow, and make investment decisions — a function the USD has reliably served for decades.

Secondly, regulatory ambiguity surrounding cryptocurrencies has stymied large-scale institutional adoption. While some countries have started to embrace Bitcoin, recognizing it as a legal form of currency or investment, others have implemented stringent regulations or outright bans. This uncertainty prevents Bitcoin from being widely accepted and integrated into the financial systems that underpin international trade, where the USD benefits from clear and established legal and regulatory frameworks.

The infrastructure that supports USD transactions is deeply entrenched in the global financial system. SWIFT, the international payment messaging system, is integral to the execution of cross-border transactions and is largely denominated in USD. Efforts to develop Bitcoin-based alternatives have yet to reach a comparable scale or level of trust, leaving the USD as the preferred currency for global business and finance.

The central banks also play a crucial role in this dynamic. Many hold significant reserves of USD as part of their financial strategy. This established practice reinforces the dollar’s dominance and presents a considerable barrier to Bitcoin’s ascendancy since Bitcoin cannot be easily managed or controlled by any central authority, which makes it inherently less attractive as a reserve asset from a central bank’s perspective.

The USD’s role in commodities trading — especially in the oil market, where it is used as the standard currency for pricing — further entrenches its position. A move away from the USD in these markets would signal a more pronounced shift towards de-dollarization, one which Bitcoin has yet to influence significantly.

Another aspect to consider is the advancements in USD-based digital payments. The rise of fintech and the increasing digitization of the dollar through services like PayPal, Stripe, and even potential Central Bank Digital Currencies (CBDCs) directly conflict with Bitcoin’s utility as a digital currency. These centralized digital services offer many of the same benefits that Bitcoin does — such as faster and cheaper transactions — but come with the added stability and regulatory clarity of the USD.

The international community’s response to crises often reaffirms the dollar’s centrality. In times of global economic uncertainty, investors and governments alike tend to flock to the perceived “safe haven” of the dollar, further perpetuating its dominance. Despite Bitcoin’s narrative as a digital gold that could play a similar role, it has yet to be broadly embraced as a safe haven asset to the same degree as the USD or actual gold.

While Bitcoin made substantial inroads and showcased the potential to disrupt conventional financial systems, the narrative of de-dollarization seems to be losing ground. The USD’s entrenched position in international transactions has proven resilient, bolstered by its stability, regulatory clarity, and extensive infrastructure. For Bitcoin to fulfill the early promise of its advocates, substantial changes in market dynamics, regulation, and global economic trends would be required. Until then, the USD appears set to continue its reign as the preeminent currency in international trade.