The US might lead the world in crypto if Trump wins again

>> How will the US dollar move if Trump wins again?

This week will be dominated by monetary policy decisions; from the Fed, Bank of England and Bank of Japan. No doubt all will receive lots of airtime, particularly the Fed, if it signals that it is ready to cut rates – probably in September. But however much the FX market tries to make out of monetary policy differences, it is clear that only one currency is being significantly impacted: the yen. Other currencies, like euro/dollar and sterling/dollar are very stable.

This hints that monetary policy is probably not a significant factor. That might be because policy is pushing in the same direction, even if it is at different speeds. Currencies move when real divergence occurs, and, for that we seem to have to look at politics, not monetary policy.

Former president Donald Trump’s first term in office revealed a number of ways in which the administration was diametrically opposed to the views of many others. One, of course, was on tariffs, although it seems more recently that others have got the habit. Another more recently is with respect to Ukraine, where Trump wants the war over quickly, which probably means allowing Russia to hold onto the land that it has won.

There is yet another area where Trump seems diametrically opposed to the views of many others and it was expressed again in his speech at the weekend. The former president’s comments show that he loves cryptocurrency but hates central bank digital currency (CBDC). This was not always the way, at least as far as crypto is concerned, but there is an election to be won. For most other policymakers in developed and developing countries, things are the other way around.

Many are embracing the idea of CBDCs while maintaining a healthy dislike of cryptocurrency for numerous reasons, not least its potential use in terrorist financing. But whatever the pros and cons of each of these, there’s little doubt that a second term for Trump would see the US move in a different way to many others. Trump would like the US to lead the world in crypto because, if it does not, China will. And he will also presumably outlaw the Fed from adopting a CBDC.

Given Trump’s much publicised aversion to a stronger US dollar, could it be the case that these positions on both crypto and CBDCs are another expression of this bias? For instance, much of the ethos around crypto is that it can displace fiat currency and will likely do so as central banks devalue their currencies by printing excessive amounts of cash.

>> Currency market calm could be shattered by the US election

As the US gains the most revenue from being able to issue the world’s foremost currency it would seem that the US – and the dollar – has the most to lose if crypto use crowds out the dollar and other fiat currencies. It is a similar situation when it comes to CBDC. The argument goes that if another central bank can offer exporters, importers and investors direct access to accounts at the central bank it will crowd out those that don’t – like the Fed.

Putting these two things together it might seem that adopting such diametrically opposed views to most other policymakers around the world is consistent with Trump’s desire to avoid an excessively strong US dollar. It might even be a surreptitious attempt to undermine it.

However, nothing is as simple as it seems. For a start, despite all the fanfare, it is hard to argue that crypto is displacing fiat currency and that’s in spite of the fact that central banks have presided over huge – currency destroying – inflation in recent years. A second issue is that there’s not really a good argument that CBDC development by other central banks will displace the US dollar.

Steve Barrow, Head of Standard Bank G10 Strategy said one reason for this would be that non-Chinese companies, for instance, won’t want to use a Chinese CBDC, even if they could, because they won’t want the Chinese authorities to be able to see their payments. Now we’ve barely scratched the surface of this issue but our sense right now is that Trump’s views on crypto and CBDCs are not necessarily the dollar-destroying proposals that some might envisage.