We apply concepts of network competition to analyze the role of the dollar, a BRICS alliance against the dollar, and cryptocurrency in a competition for hegemony in global cross-border payments. Money networks have network externalities; a currency becomes more valuable as more users in more countries accept it and use it. Users thus tend to converge on a single, dominant money network for cross-border payments that maximizes their demand-side economies of scope.
The United States (US) dollar has been the dominant money network since World War Two. This hegemonic status, which provides significant political and economic benefits to the US, is not immune to challenge, however. The Dutch Guilder gave way to the British Pound; the British pound gave way to the US dollar. Many factors contribute to the continued dominance of the US Dollar, but there are also many that have started to threaten it. Before taking office, President Trump warned BRICS member states to refrain from developing or backing a currency that could replace the US dollar, threatening 100% tariffs as retaliation. Incidents like this indicate that the dollar is part of trade and diplomatic negotiations with other countries – what Cohen, 2015 called a “negotiated currency”. This has not been the case since the oil shocks of the 1970s, so alarm bells should be ringing in Washington D.C.
In this paper we argue that the dollar can strengthen its global dominance by fostering stronger interconnection with cryptocurrency; specifically, Bitcoin. Drawing on empirical evidence from telecommunications competition and network externality theory, we show that when three systems with network externalities compete, an interconnection agreement between the dominant system and one of the two competitors can isolate and exclude the third system.
