The ongoing conflict in Ukraine has surfaced an economic trend that could have far-reaching effects. With economic sanctions, capital controls, and a brewing resource war, nations seem to be reconsidering the status quo. Here’s why this could lead to a split in the global economy and what that could mean for digital assets.
In 2022, the global economy is still dominated by the United States. The country has the largest economy, the most influential consumer base, and a tight grip on global capital networks. For instance, it’s the most influential member of the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which means it plays a key role in communications about financial transactions. It’s also the biggest trading partner of most countries and the US dollar is the primary reserve asset across the world.
Combined with military power, the U.S. has more political influence than any other nation. This is known as American hegemony.
America’s outsized influence is on full display with the ongoing war in Ukraine. The country has convinced its allies to sanction Russia, which has isolated the country from the global financial system. Usually, this pressure would have been enough to end the war, but Russia seems to have an alternative: China.
China’s growing influence
There’s no doubt that China’s economy has been growing at a relentless pace for decades. In nominal terms, the country is now the second-largest economy in the world. Experts like Ray Dalio believe China’s growing economic influence is a sign that it could dominate the changing world order.
China’s partnership with Russia and growing influence in the Middle East could be an early indication of this. Russia may be relying more on China’s alternative to the SWIFT system known as the Cross-Border Interbank Payment System (CIPS). The country has also agreed to use the Chinese renminbi for international trade and payment purposes. That shift may have convinced Saudi Arabia, the world’s largest oil producer, to consider the yuan for trade too.
It seems likely that the global economy is splitting into two circles of influence – controlled by the US and China respectively. However, both these circles are state-controlled and based on fiat. There is a third alternative: crypto.
Bitcoin as a safe haven during the Ukraine crisis
Detached from any government and based on a decentralized digital network, Bitcoin could serve as a third leg of the global economy. Some countries, institutions, and consumers may want an alternative to both the US and Chinese hegemony. Digital assets, and Bitcoin, in particular, could serve this purpose.
We’ve already seen how nations like El Salvador and Ukraine have used Bitcoin to bolster their economies. Meanwhile, other nations like South Korea, Switzerland and Mexico have indicated that they could adopt the digital asset too.
While it’s too early to tell if any of these trends are sustainable if they carry on with this momentum the global economy could be split into three circles of influence. Only one of these would be decentralized.