The US dollar has been the leading reserve currency worldwide for a long time and has served as the preferred medium for international trade and transactions. However, its position is increasingly being challenged as geopolitical and economic shifts, coupled with fears about the potential use of the dollar as a weapon, have motivated various nations to seek ways to reduce their reliance on it.
The influence of the US dollar in the global economy is remarkable. While the United States holds about 25% of the world’s GDP, its currency comprises nearly 60% of global foreign exchange reserves, significantly surpassing its closest competitor, the euro.
Yet, this hegemony is encountering rising challenges. The strategic application of economic sanctions has prompted some countries to look for alternatives, despite threats from US leadership of severe tariffs against those attempting to minimize their use of the dollar.
In Russia, where access to the SWIFT payment network has been severely restricted due to sanctions, many businesses have turned to cryptocurrencies to bypass these limitations, utilizing Bitcoin and other digital assets for international transactions. While the central bank of Russia outlawed cryptocurrency a few years back, recent regulatory changes have enabled businesses to start using crypto since late last year.
The Russian government has authorized the use of cryptocurrencies for foreign trade and has taken steps to legalize cryptocurrency mining activities, including Bitcoin.
Bitcoin, sanctions, and the move toward dedollarization
Since its creation, Bitcoin advocates have been focused on the concept of “dedollarization,” which refers to efforts aimed at diminishing the dominance of the US dollar as a global reserve currency. This broadly involves decreasing dependence on the dollar in vital financial and trade activities, such as oil and commodity transactions, foreign exchange reserves, bilateral trade agreements, and investments in dollar-denominated assets.
A 2024 analysis by a financial expert suggested that the emergence of digital currencies presents both “opportunities to erode and reinforce” the dollar’s standing, with the possibility of substantially changing the global currency hierarchy.
Still, while digital assets, particularly stablecoins, are becoming more popular, it may be premature to expect a significant dedollarization of the crypto market.
While Bitcoin is increasingly regarded as a strategic reserve asset, experts caution against prematurely labeling it a viable alternative to the dollar. Countries like El Salvador have adopted Bitcoin fervently, with it constituting roughly 15% to 20% of their overall reserves. The US has contemplated similar strategies, but widespread adoption remains limited, raising questions about whether these actions would actually weaken the dollar’s strength rather than bolster it.
Brandon Mintz, CEO of a Bitcoin services company, stated,
“For Bitcoin to genuinely become a true substitute for the USD, it would necessitate broader mainstream acceptance, clearer regulations, and more scalable infrastructure.”
Currently, Bitcoin functions more as a hedge and a store of value rather than a direct replacement for the dollar, though this role may evolve as global financial conditions change. Factors like inflation and geopolitical strains could lead to increased interest in Bitcoin, Mintz added.
While institutional adoption and transnational usage are rising, it remains uncertain whether Bitcoin can legitimately rival the dollar’s supremacy, as future trends will dictate its path.
Related: 3 reasons Bitcoin experiences dips in response to tariff news
Despite its increasing popularity, Bitcoin’s volatility presents a substantial hurdle. According to industry research, Bitcoin shows significantly higher volatility compared to gold and is more correlated with tech stocks than traditional safe-haven securities.
Average daily volatility of major assets – annualized data source
An expert from a prestigious university remarked that,
“Decentralized cryptocurrencies like Bitcoin suffer from high volatility, making them unsuitable as mediums of exchange or reserve currencies.”
Declining global foreign reserves held in US dollars
Since the conclusion of World War II, the US dollar has dominated the international currency landscape, facilitating around 88% of global trade transactions as of 2024.
The dollar’s place as the foremost international currency is well-documented. According to data from the International Monetary Fund, central banks held about 58% of their allocated reserves in US dollars by the third quarter of 2024, much of which is in cash and US treasury bonds. This dwarfs the euro, which has just about 20%.
Foreign exchange reserves allocation by central banks.
While the US dollar continues to be the leading global currency, known for its stability, recognition in international commerce, and status as a key reserve asset for central banks, indicators point to a potential decline in its reign. The share of global foreign reserves held in dollars has decreased from over 70% in the early 2000s to under 60% today.
Proportion of global FX reserves held in US dollars.
This pivot occurred after February 2022 when the US government froze $300 billion of Russia’s liquid foreign exchange reserves situated in the US and NATO nations. While many US allies supported this measure, it reverberated across global markets, underscoring the risk that the US could use the dollar as a tool against both adversaries and possibly allies who pursue policies contrary to American interests.
Addressing the effects of sanctions and the responses from affected nations, a recent analysis from a reputable institution noted that,
“Financial sanctions have historically prompted central banks to shift some of their reserves away from currencies susceptible to freezing, opting instead for gold, which can be stored domestically and is therefore immune to sanctions.”
Do stablecoins actually reinforce dollarization?
Despite BRICS+ nations’ efforts to counter US dollar dominance, the dollar’s value has remained robust in recent times. The US Dollar Index has risen by approximately 8% over the last five years.
In the cryptocurrency sphere, stablecoins have surfaced as some of the fastest-expanding digital assets, often viewed as a potential solution for cross-border payments. However, a vast majority of these stablecoins are still pegged to the US dollar.
Currently, the stablecoin market capitalization is about $233 billion, with US-dollar-pegged stablecoins like Tether dominating an astonishing 97% of the market according to available statistics.
This significant reliance on USD-backed stablecoins implies that, instead of undermining dollar supremacy, these digital currencies may actually reinforce it. “With USD-linked stablecoins at the core of this digital ecosystem, we have a unique chance to extend US financial influence globally—if policymakers act promptly,” remarked a blockchain advocacy leader on social media.
The onset and broad acceptance of central bank digital currencies (CBDCs) have the potential to disrupt several cryptocurrencies, especially stablecoins, by offering efficient and low-cost digital payment alternatives.
“A widely accessible digital dollar could diminish the case for privately issued stablecoins, although stablecoins released by major corporations might still maintain some relevance,” the expert commented.
Nonetheless, the academic emphasized that no credible alternative currently exists to displace the US dollar as the primary global reserve currency.
“The dollar’s advantages lie not just in the breadth and liquidity of US financial systems but also in the institutional framework that supports its status as a safe asset.”
This content is intended solely for informational purposes and should not be construed as legal or financial advice. The opinions expressed herein are those of the author and do not necessarily reflect the views of any affiliated organizations.