Treasury Secretary Scott Bessent in recent months described the Trump Administration’s approach to sanctions on Iranian oil as “In essence, we are jiu-jitsu-ing the Iranians.” However the United States isn’t the only actor training in the dojo, and we can expect much more sanctions martial arts in the near future.

In late June, the Wall Street Journal reported that senior lawmakers in Beijing advanced a bill that would let Chinese state prosecutors bring civil “public-interest” suits against foreign organizations and individuals who allegedly damage China’s interests. The bill would add to the growing set of laws that Beijing and other countries have written to counter foreign sanctions.

Nobody likes being told what to do — least of all governments. When Washington imposes sanctions, it isn’t only barring American citizens from dealing with a target. It also warns foreign companies, in other countries, that they too must cut off the target or risk losing access to the U.S. market and financial system. Any sovereign state would reasonably bristle at that kind of reach into their domestic affairs. But when the meddling state controls the world’s dominant currency, the rest of the world typically chooses to tolerate the meddling albeit with protest and the occasional attempt to fight back. But historically those attempts to counter, which go back decades, were pure theater: professions of sovereignty that let policymakers feel that they’d taken a stand without ever really being enforced. That is starting to change.

Training montage

Western democracies were the first to take a shot at limiting the U.S.’s extraterritorial reach. Australia went first, with the Foreign Proceedings Act of 1984 — a response not to sanctions but to U.S. antitrust suits reaching across the Pacific to haul Australian uranium producers into American courts. Canada followed with the Foreign Extraterritorial Measures Act, a similar defensive crouch against the reach of U.S. antitrust and trade law. Although these were primarily about antitrust and not sanctions, they laid the groundwork for challenging the jurisdictional reach of the United States.

Then the U.S. Congress passed the Helms-Burton Act, also known as the 1996 Cuban Liberty and Democratic Solidarity Act, which let eligible U.S. nationals sue anyone, anywhere, who “trafficked” in American property nationalized by the Cuban government after 1959. The act, quickly followed by the Iran and Libya Sanctions Act that same year, enraged our allies and pivoted attempts to counter U.S. extraterritorial reach from antitrust to sanctions. Canada amended their Foreign Extraterritorial Measures Act to block Helms-Burton judgments outright; Mexico passed its “Antidote Law“; and the Europeans’ 1996 Blocking Statute barred EU persons from complying with U.S. sanctions, refused to recognize foreign judgments enforcing those sanctions, and let the damaged parties claw back losses by seizing the offending party’s EU assets.

All in all, a mighty show of force. But mostly on paper. The statutes were rarely invoked and rarely tested in court. Canada issued blocking orders under FEMA, but no prosecution was ever reported and its courts never interpreted the act. Mexico’s “Antidote Law” sat all but unused. The EU’s statute went a quarter-century without an authoritative ruling.

First blood

Iran landed a first strike in December 2018. Deutsche Telekom terminated its relationship with Bank Melli, a state-owned Iranian bank on OFAC’s Specially Designated Nationals (SDN) list. Bank Melli challenged the termination in German courts under the Blocking Statute, and the case climbed to the European Court of Justice (ECJ) in 2021. The court ruled that an EU firm could not terminate a contract to comply with U.S. sanctions, and where the evidence suggested that sanctions had motivated the termination, the terminating firm bore the burden of proving that its decision was based on grounds other than compliance with U.S. sanctions. However, the court also ruled that a termination could stand where a continuation of the contract would inflict disproportionate economic loss (like getting cut off from the U.S. market) on the terminating firm. So although this was a legal win for Bank Melli, in practice the size and strength of the U.S. financial system prevailed.

Full contact

The Bank Melli case set the stage for more assertive countersanctions efforts — and where Bank Melli had merely picked up a dormant 1996 tool, other actors picked up new tools and used them at scale.

Russia went furthest in the courts. Under the 2020 “Lugovoy Law,” named for the sanctioned Member of Parliament who sponsored it, Russian parties affected by sanctions were allowed to sue foreign companies in Russian courts for damages regardless of where a contract agreed to arbitration. In 2024 alone they invoked it more than 200 times, with one penalty reaching €14.3 billion. By June 2026, Russia’s Supreme Court had told every lower court to treat countersanctions as overriding law, even reopening settled cases to void deals that breached Russian countersanctions law. Russia’s extreme measures reflected their decision to sever commercial ties with the West.

China has taken a slightly different tack, likely because Beijing wants to deter the West without decoupling from it entirely. In 2021, China passed the Anti-Foreign Sanctions Law which created a private right of action and gave Chinese companies recourse to pursue damages in Chinese courts when their rights were infringed by foreign sanctions. Again, like most countersanctions laws, it remained dormant until 2024, when a Chinese offshore-engineering firm which had recently been inducted into the SDN club (sanctioned) invoked the 2021 law’s private-suit provision against a Swiss counterparty that had stopped paying the Chinese firm out of fear of U.S. sanctions. A Chinese court ignored the contract’s agreement to arbitrate in London, arguing it was subordinate to Chinese sovereignty, and seized the Swiss firm’s vessel until it paid. The Swiss firm eventually received an OFAC license to pay the damages. Beijing’s Supreme People’s Court has since paraded the case as a landmark ruling.

In 2021, in addition to the Anti-Foreign Sanctions Law, China passed its Blocking Rules. These rules authorize the Chinese government to declare specific foreign sanctions unenforceable in China and prohibit Chinese entities from complying with them. In May 2026, China activated the Blocking Rules for the first time. The Ministry of Commerce issued a blocking order declaring U.S. sanctions on five Chinese “teapot” oil refiners (which had been refining Iranian crude) unenforceable in China and prohibiting Chinese companies from complying with those sanctions.

Statecraft jiu-jitsu

So why, after decades of dormancy, are countersanctions laws suddenly being enforced? Part of the answer is that the use of sanctions has expanded. Secondary sanctions — Washington’s practice of forcing foreign firms to choose between doing business with a designated entity (even when there is no U.S. nexus) and the U.S. financial system — have proliferated. As the reach of American sanctions has grown, the pressure on other states to respond has also grown. Also, the power of an alternative cannot be underestimated. Russia and China have developed backup methods for conducting cross-border payments. Everyone is more confident taking risks with a parachute and a net.

But even when countersanctions laws are enforced, the results are messy. The laws can deliver a legal win on paper, yet actually shielding foreign companies from U.S. power is still incredibly difficult because nothing really challenges America’s control over the dollar. Bank Melli scored a principled victory at the ECJ, but the court quickly interpreted the law to include an escape hatch for firms with serious U.S. exposure. The Chinese offshore firm won in Nanjing, yet the Swiss counterparty only paid up after getting an OFAC license. In each case, the legal pushback ran straight into the reality of U.S. financial might.

None of this, though, will make the laws go away. If anything, they are proliferating, with India now studying an EU-style blocking statute of its own. These laws will raise the costs of enforcing U.S. financial sanctions and will certainly complicate commercial engagement with countries that are at a high risk of sanctions.

As other countries increasingly reach for countersanctions laws, foreign businesses will enter a devil-you-know-or-the-devil-you-don’t phase of international commerce. Complying with U.S. sanctions used to be the path of least resistance. Countersanctions laws complicate that calculus. Both Russian and Chinese rules now let sanctioned parties pull disputes into their home courts — disregarding the arbitration clauses and governing law that have underpinned cross-border contracts for decades.

In statecraft jiu-jitsu, Washington can strike first but should start to expect counterstrikes. Each invocation of countersanctions laws normalizes resistance and raises the price of extraterritorial enforcement for the U.S. It remains to be seen how Washington might adapt to a new world where every major designation carries legal risks and strategic trade-offs. A first test might come in how policymakers respond to the Chinese banks who will inevitably continue working with the designated “teapot refiners,” now the General License X (OFAC’s temporary permission to import Iranian crude) has been revoked. Will Washington hit the Chinese banks? Will they find a creative counter? Welcome to the dojo.

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Happy 250th birthday to the United States of America!

It’s safe to say our country today looks different than it did a century or a semiquincentury ago (we have, for example, evidently gotten good at football soccer?). But one thing hasn’t changed: America loves a monetary experiment.

This week a consortium of more than 140 companies including Visa, Mastercard, BlackRock, Coinbase, and Stripe signed on to back Open USD, a new dollar-backed stablecoin operated by an independent entity called Open Standard.

The internet is already alight with comparisons to Libra and The DAO. I’m going to resist that reflex. Open USD’s details are still emerging, and we don’t know much about the mechanics of governance, redemption, and reserves. So rather than force a comparison to a project we can’t yet fully see, we’re going to look at some lessons from America’s first quasi-consortium currency: the Continental dollar.

Rethinking the Continental

Writing a declaration of independence is simple. Piecing together a ragtag national army from butchers and farmers isn’t even all that complicated. But financing a war! Financing a war without immediate heavy taxation is another matter entirely.

Congress issued roughly $200 million worth of Continental dollars between 1775 and 1779 to finance the Revolutionary War, mainly covering soldiers’ pay and supplies. The currency is often used as a cautionary tale: Congress issued too much paper, prices soared, the currency plummeted, and to this day we still use the phrase “not worth a Continental.” Such was the widespread distrust of paper money following the Continental experiment that the Constitution of 1787 prohibited states from issuing bills of credit and omitted any explicit congressional power to emit paper money.

Economist Farley Grubb offers a different interpretation with useful lessons for today’s monetary experiments. He interprets the Continental dollar as functioning like a zero-interest bearer bond: each note promised redemption in Spanish silver dollars (or equivalent gold or silver) at future dates set by Congress. The notes however would trade at a discount until their maturity date. States would later gather the notes when collecting taxes, remit them to the Continental Treasury, and the bills would be destroyed. Literally burned. This let Congress finance the Revolutionary War immediately while spreading out repayment over time through future tax collections.

Congress established clear redemption schedules for the states with the first two emissions of notes. The first was to be redeemed in four annual installments beginning in 1779. The second emission of notes was to be redeemed in another four annual installments beginning in 1783. But for the next eight prints of Continental notes, Congress never approved explicit redemption schedules. Grubb suggests one contributing factor was that New Jersey delegate Richard Smith — who actually understood the mechanics of the system — left Congress and took his institutional knowledge with him. The ultimate group project fail. Congress and its treasury committee each assumed the other would be responsible for setting the schedule. So the schedule was never completed.

That omission created widespread uncertainty about the currency. As Congress authorized the printing of more notes, the American public extrapolated from the original schedule, pushing expected redemption dates as far out as 1818. Grubb argues that this produced a steep time discount: notes issued in later years traded well below face value from the moment they were issued, a decline historians interpreted as currency depreciation. Congress attempted to undo the damage in 1779 and 1780 by retroactively imposing fiscally unrealistic redemption schedules. Instead, those changes undermined credibility and accelerated the currency’s collapse.

Lessons for the next Continental

There are three clear lessons here as we embark upon new and scintillating monetary experiments:

Ambiguity creates assumptions: The Continental dollar worked reasonably well at first because the redemption schedules for the initial emissions were clearly defined and publicly communicated. When Congress failed to specify redemption dates for the next eight emissions, the public had to guess when the next schedule started. This created a steep time discount that made later bills worth far less than face value from issuance. Any monetary project must clearly document and communicate its redemption, reserve, and governance mechanics upfront. Ambiguity invites extrapolation and expectation becomes reality.

Credibility is earned slowly and lost quickly: In 1779 and 1780, Congress retroactively altered redemption terms on already-issued dollars with unrealistic new schedules. This destroyed credibility and triggered the currency’s collapse. The same mistake has doomed modern projects — such as Celsius unilaterally freezing withdrawals. Once participants accept a currency based on stated rules, the issuer changing those rules after the fact signals that promises are not binding.

Collaborative efforts require collaboration: Redemption of Continental notes depended entirely on the states who levied the taxes, collected the notes, and remitted them to be burned. Yet when Congress rewrote the schedule in 1779, it set terms without regard for whether the states could plausibly meet them. The new timetable implied tax levels many multiples beyond anything the states had ever collected. Strong monetary systems require that the parties who must execute the rules have a genuine role in setting them.

The Continental dollar reminds us that America’s monetary experiments have always been bold. As we mark the nation’s 250th birthday, what we have learned from the Continental is that sound money requires clarity, credibility, and genuine coordination. That wisdom is worth carrying with us as we celebrate two and a half centuries of independence. Let freedom ring.

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U.S. financial sanctions are sometimes portrayed as the hammer with which we smash our enemies into smithereens. There is much less fanfare around general licenses, which precisely shape sanctions programs, and historically have carved out targeted exceptions from smithereendom for humanitarian aid, medical goods, wind-down periods, official U.S. government business, and limited sector-specific activities such as civil aviation safety or port operations.

However, OFAC’s most recent general license (GL) for Iranian crude — GL X, published June 22 — marks a notable evolution. It authorizes the production, delivery, and sale of Iranian-origin crude oil, petrochemicals, and petroleum products through August 21, 2026. What’s new is that it explicitly permits U.S. dollar-denominated payments directly to the Government of Iran or other blocked person for these transactions. Based on our review of the 355 active and inactive general licenses currently available on OFAC’s site, this is likely the only license that specifically calls out dollar use for large-scale commercial activity to a sanctioned government.

We think this approach can be taken even further.

License to (dollar) bills

OFAC probably added the explicit U.S. dollar payment language in GL X for a couple reasons. First, Scott Bessent confirmed on Wednesday that negotiations with Iran have included discussions about Iran invoicing in U.S. dollars, according to Bloomberg. Second, it serves as a direct signal to international financial institutions that these transactions have Washington’s blessing, reducing the risk of overcompliance — overcompliance is a major issue for U.S. policymakers because financial institutions’ fear of shifting government priorities often strangles activity the U.S. has explicitly authorized through a license.

OFAC has been providing general licenses throughout the Iran crisis in order to provide targeted relief to energy markets, such as the time-bound General Licenses for Russian-origin crude (GL 134). Given the fact that three of our top five most designated jurisdictions are energy exporters, it is reasonable to assume we will go down this road again. If the U.S. is going to continue to lean on general licenses both as a way to provide relief to markets AND as a tool of diplomatic leverage, we should selectively begin including dollar mandates and require that transactions using the licenses are conducted in U.S. dollars.

Why? Countries have spent years building alternative payment systems. Simply permitting activity like oil sales could give sanctioned states and their partners the relief they need to accelerate their shift toward non-dollar payment systems. Recent WSJ reporting on the Iranian government actively evading U.S. sanctions on crude oil with the help of China makes the risk clear. There is also a case to be made that mandating oil sales in USD could route some of the existing sanctioned oil trade in RMB back into USD.

There is a precedent for this shift in policy. In the Venezuela oil-sector general licenses (for example GL 46C, 48B, 50B, and 52A), the U.S. does not simply permit transactions but also mandates the terms. These licenses require that any contract with the Government of Venezuela or PdVSA be governed by U.S. law, with disputes resolved in U.S. courts. They also require that payments to blocked persons (other than local taxes or fees) be deposited into Foreign Government Deposit Funds — U.S.-controlled accounts established under Executive Order 14373. In short, the United States is already dictating both the legal framework and the financial plumbing for permitted activity. Licenses involving the Cuba program contain similar, though narrower, provisions allowing certain dollar-clearing transactions. However, most of the other general licenses we reviewed contain no such conditions.

GL X therefore stands out as one of the clearest examples of a small but growing group of licenses that move beyond passive permission and into active control.

Hello Tehran

There is a great scene in Wayne’s World 2 where Ozzy Osbourne’s former roadie tells Wayne and Garth that Ozzy refused to perform unless he had one thousand brown M&Ms.

“So there I am, in Sri Lanka, formerly Ceylon, at about 3 o’clock in the morning, looking for one thousand brown M&Ms to fill a brandy glass, or Ozzy wouldn’t go on stage that night.”

If Ozzy Osbourne can demand 1,000 brown M&Ms, then the United States — the rock star of global markets — can mandate that any transaction temporarily permitted under a general license be conducted in U.S. dollars and routed through the U.S. financial and legal system.

The era of purely permissive licenses is ending. If the U.S. government is going to use licenses as short-term leverage, we should shape the conditions of access. The dollar rider in GL X could be part of the future of American financial power.

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Last week, the world witnessed the largest IPO in history. SpaceX debuted on the Nasdaq, raising $85.7 billion and pushing past $2 trillion in market value after its first day of trading. Not only did this make Elon Musk the world’s first trillionaire (you go, Glen Coco), but the IPO also served as a vivid reminder of America’s equity dominance: the ability to convert new technology into financial assets and to wield access to those markets as a source of geopolitical leverage.

Built to absorb it

At the insistence of my editor that I not wade into the business of personal investment advice Substacking, I won’t comment on whether a company that had a net loss of $5B in 2025 deserves to trade at a $2 trillion valuation or is capable of reaching trillions in revenue within 15 years. Not my lane. In fact it doesn’t matter what you think about the fundamentals of the stock.

What are much more remarkable are the fundamentals of the U.S. market. The fact that American financial markets easily absorbed a $2T listing — and the fact that listing had two exchanges to choose from! — is nothing short of extraordinary. The U.S. once again proves it has the deepest and most liquid capital markets in the world.

SpaceX increased U.S. equity market capitalization to $78 trillion. The next biggest equity market is China with $15 trillion, followed by Japan with $9 trillion. America’s equity market is larger than the rest of the top 10 largest national markets put together. A $2 trillion listing is large but comfortably absorbed by the U.S. market. In every other major market, it would represent an outsized portion of the entire national stock market.

SpaceX represents around 2.5% of U.S. market cap, but had it been listed on a Chinese or a Hong Kong exchange it would have represented 15% or 30% of market cap, respectively. It is hard to find comparisons. Saudi Aramco, whose IPO was large in absolute terms, was listed on the Saudi Exchange, Tadawul, where the company accounts for roughly 67% of total market capitalization — with only a tiny public float of 1.5–2.5% actually available for trading. Not exactly a broad and liquid private-sector listing.

The sheer size of the capital raised ($85B) would also have strained other exchanges. The previous record, Saudi Aramco’s 2019 listing, raised $25–29 billion. Even Hong Kong, which was the strongest IPO venue in 2025, raised $37.4 billion across all listings, roughly half of SpaceX’s single-day raise. This extraordinary depth of institutional capital, venture funding, retail participation, and secondary market liquidity gives the United States unmatched ability to price and fund frontier technologies at scales that no other nation can match. It is a foundational pillar of American equity power.

Light the fuse

SpaceX was incubated by a unique public partnership: NASA’s Commercial Orbital Transportation Services (COTS) program was the agency’s pioneering effort, launched in 2006, to pair limited seed funding with an anchor-customer commitment and fixed-price milestones. Private firms like SpaceX bore the development risk and cost overruns, while keeping their intellectual property and having the runway to build commercial markets for predictable government demand. We’ve seen a spectacular result in SpaceX’s pioneering of reusability and high launch cadence, collapsing launch costs and saving billions in taxpayer money.

No country has implemented this model for space companies at comparable scale or achieved comparable commercial outcomes. In Europe, the European Space Agency relies on the “juste retour” principle (allocating work based on member-state contributions). A 2023 Bruegel paper and the 2024 Draghi report on European competitiveness note that this approach leads to political compromises, inefficiencies, and slower progress on cost and reusability. In China, even “private” space firms operate under military-civil fusion policies that subordinate commercial priorities to state and military goals.

COTS shows how governments can catalyze private-sector innovation by structuring demand in a way that shifts risk to private firms while rewarding performance. Obviously SpaceX has since expanded beyond just rockets into satellites and AI, which greatly drove the valuation, but COTS gave the company the initial boost it needed to become one of the world’s most valuable enterprises.

Not invited to PLA(y)

Foreign firms list on U.S. exchanges primarily to access deeper capital markets at a lower cost of capital, increase liquidity, broaden their shareholder base, and gain prestige. U.S. markets also generally offer higher valuations for companies because investors have greater confidence in shareholder protections, disclosure standards, and market liquidity. Over the last 20 years the P/E ratio of the S&P 500 has on average been 18% higher than that of its international counterparts. American markets also attract the most foreign capital — not by percentage (the UK posts a near 60% foreign ownership rate) but by sheer volume at almost $20 trillion in foreign investment. Foreign companies want to list in the U.S. to take advantage of higher valuations and foreign investors want to buy into U.S. markets despite those higher valuations.

The great thing about owning something everyone wants is that you can gatekeep it. Over the last decade, U.S. equity markets have increasingly become an instrument of national security policy. A Chinese company operating reusable launch vehicles, satellite constellations, and strategic space infrastructure would likely be viewed by the U.S. government through the lens of China’s Military-Civil Fusion strategy, which seeks to integrate civilian technological development with national defense objectives. It is noteworthy that the Chinese seem to have retired this term but certainly not the strategy. Under the regulatory framework established by Section 1237 of the National Defense Authorization Act and later evolved through Executive Orders 13959 and 14032, just such a Chinese space company would likely attract intense scrutiny from U.S. policymakers. Designation as a Chinese Military-Industrial Complex Company wouldn’t be automatic, but its role in a sector closely linked to Chinese military modernization would have made it a plausible candidate for restrictions on U.S. investment.

Even absent a sanctions designation, a Chinese SpaceX would have faced another hurdle: the Holding Foreign Companies Accountable Act (HFCAA), which requires U.S. regulators to inspect the audit work of foreign issuers and authorizes restrictions or delisting when those inspections cannot be performed. In 2022, the Public Company Accounting Oversight Board (PCAOB) finally gained inspection access to Chinese auditors, which temporarily removed immediate delisting risk for Chinese companies, but this access needs to be renewed yearly.

So a Chinese SpaceX would not have competed for capital on a level playing field with its American counterpart. While there may be no shortage of investors eager to plow funds into the Chinese space industry, by the early 2020s, the United States had begun to rethink a foundational assumption of globalization: that capital should flow freely regardless of geopolitical consequences. Increasingly, policymakers viewed American financial markets as a source of national power rather than merely a venue for price discovery.

Restricting access to U.S. markets became a way for the American government to deny strategic competitors the capital needed to develop advanced technologies, strengthen an industrial base, and ultimately challenge U.S. military and economic primacy.

The best in show

The most reliable equity trade of the past few decades has been U.S. technology. It is an extraordinary sector that has compounded and compounded and created the world’s most valuable companies. Despite analysts declaring (hoping, praying?) that the trade is finished every cycle, encouraging investors to rotate into emerging markets or Europe, the U.S. still proves unmatched at directing staggering amounts of capital at innovators and letting the survivors grow into giants — enriching investors and delivering surpluses to consumers and other corporations along the way. Anyone with access to a Nasdaq chart could tell you this.

Much less appreciated is how gated that trade is becoming. The U.S. government is tightening control over who gets to raise capital in America and under what terms. Hence the use of Section 1237, EOs 13959 and 14032, the HFCAA, CFIUS. It can be very expensive to be excluded from the deepest and most liquid markets in the world — we can expect that Washington will enforce very specific compliance from foreign investors and companies to grant entry, especially as the SEC launches a “Make IPOs Great Again” agenda.

America’s “exorbitant privilege” is the strength and ubiquity of the dollar. America’s equity privilege — the world’s persisting desire to own stakes in American firms and list on American exchanges — is no less powerful. SpaceX is a powerful demonstration of this equity privilege. Everyone wants dollars. Everyone wants to go to the moon. Everyone wants their portfolio to go to the moon. That’s the American dream, baby.

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Global imbalances — the large and persistent current account surpluses and deficits that have defined the world economy for decades — can be dangerous for global stability. We’ve known this for years. So why do we tolerate them? Why can’t we fix them?

First, there’s active disagreement on what causes deficits, with two schools of thought each prescribing different policy responses and muddying our response.

Second, solving imbalances requires either painful domestic policies that governments won’t implement voluntarily, or coercive international instruments outside the norms of the rules-based order.

Third, the framework under which the rules-based order governed previous conflicts on imbalances is kaput. With the return of great power competition, rising conflict, and weaponized interdependence, countries will view surpluses as a way to build war chests — and what country in their right mind is going to willingly sacrifice that.

I don’t care who broke it. Someone fix it!

Economists have been debating the merits, risks, and underlying causes of trade imbalances since at least 1628, when the English merchant Thomas Mun argued that a nation’s wealth was built by exporting more than it imported and accumulating the difference in gold.

And after centuries of debate, two schools have emerged:

The orthodox school

This is the position that dominates the IMF, most central banks, and the bulk of academic economics. It holds that current account imbalances are the result of domestic savings and investment decisions. A country that saves more than it invests runs a surplus. A country that invests more than it saves runs a deficit. The orthodox school holds that current account imbalances are fundamentally driven by domestic policy choices (fiscal, monetary, structural, and regulatory).

For example, Chinese domestic policy disincentivizes spending while American domestic policy does not. Maurice Obstfeld points out that dollar dominance plays no role in forcing deficits because 1.) history has shown that the United Kingdom had reserve currencies and current account surpluses, and 2.) dollar demand can come from the offshore dollar market, not just through trade.

The heterodox school

The heterodox school disagrees on what causes current account imbalances. It posits that large autonomous capital flows — e.g. reserve accumulation by central banks in countries running a surplus, flight-to-safety dynamics, global demand for dollar-denominated safe assets — are the primary driver. The heterodox school assesses that the financial account determines the current account, and therefore the dollar’s reserve currency status creates a permanent bid under the dollar that makes U.S. exports persistently uncompetitive regardless of what Washington does with its budget.

The two schools both agree that distortive domestic policies — suppressed consumption, fiscal deficits, managed exchange rates — shape a country's own current account balance. Where they split is on how far those distortions travel. Maurice Obstfeld and the orthodox camp hold that exchange rates are not a sufficient statistic for the trade balance but acknowledged that demand for the dollar due to its reserve status may make the dollar stronger against foreign currencies than it would be otherwise. In a recent article, Brad Setser and Shahin Vallée counter that China's currency undervaluation is a first-order force driving its ballooning surplus and the global imbalances that follow.

Even though the two schools can’t agree on why we have imbalances, they largely do agree that imbalances are dangerous in two distinct ways:

• Financial fragility: Persistent deficits eventually become large net liability positions internationally (you owe other countries a lot of money). When investors begin to question the economic dynamics of a country running big deficits, capital flows can reverse, creating large outflows that cause sharp currency adjustments and an inability to fund government spending. As the provider of the world’s reserve currency, the U.S. is at less of a risk of severe capital flight, though the world is highly exposed to U.S. assets which would increase potentially catastrophic ripple effects of a financial crisis that originated in U.S. securities.

• Beggar-thy-neighbor: Protective measures that increase export competitiveness — through labor laws or currency management — can have negative impacts on trading partners. A paper from several years ago showed that the 2000-2012 trade shock from China reduced manufacturing employment as a share of the American working-age population by about 1.6 percentage points from 2001-2019. The IMF notes that perceptions of unfair trade practices can fuel protectionist policies that undermine global commerce.

Again, both schools of thought largely agree that imbalances are dangerous and the current trajectory is unsustainable. And yet forty years of combined intellectual effort have led us to large and persistent global imbalances.

Have we learned nothing from history?

Gita Gopinath of Harvard identifies three waves of global imbalances characterized by persistent U.S. current account deficits in the post-Bretton Woods era.

The 1980s: The Plaza Accord of 1985 marked the first coordinated attempt to address global imbalances, with G5 finance ministers agreeing to weaken the dollar. Congressional threats of protectionist legislation gave surplus countries strong incentive to cooperate. The Accord depreciated the dollar and defused the immediate protectionist threat, and imbalances did eventually narrow — though only after a two-year lag as domestic fiscal adjustment and a slowdown took hold. However, the underlying export-led growth model remained intact for many rising economies.

The 2000s: After the Asian Financial Crisis, dollar reserve accumulation surged as countries sought insurance against future shocks. The resulting “global savings glut” (per Bernanke) pushed capital into U.S. markets and the American deficit widened alongside it. U.S. policymakers debated the causes of these inflows, but the Global Financial Crisis interrupted the debate and temporarily accomplished what policymakers couldn’t do on their own: a reduction of imbalances.

Today: The net global imbalance has returned with a vengeance. China’s trade surplus has reached record levels while the U.S. current account (the trade balance plus the income America earns on its overseas investments) keeps deteriorating.

So we’ve learned that it takes either a coordinated currency intervention coupled with painful domestic adjustments or a global crisis to temporarily relieve global imbalances. Which doesn’t exactly arm us with many sophisticated policy options. This gives “We had forty years of global imbalances and all I got was this lousy t-shirt” vibes.

The game has changed

Policymakers have long shared the assumption that countries running surpluses would eventually respond to economic pressure because those surpluses were economic instruments with economic aims. That is no longer the case.

China’s domestic financial repression and forced saving are how Beijing accumulates buffers against external shocks, builds industrial capacity, and maintains the export dominance that both creates chokepoints (e.g. access to critical minerals) and buys political relationships across the developing world. We are kidding ourselves if we think that asking China to dismantle a strategic instrument in exchange for incremental macroeconomic welfare gains that accrue to Chinese households rather than to the Party will fall on anything except deaf ears. Why would any country give up a war chest after idealistic multilateralism has given way to pragmatic transactionalism?

After Crimea, Russia spent eight years deliberately accumulating reserves and running current account surpluses, explicitly to insulate the economy against external shocks. Russia invaded Ukraine with $643 billion in reserves that it probably planned on using to fund the war. Then the West froze those reserves in one of the most consequential actions of geoeconomic policy in the last century.

Surpluses buy buffers; buffers enable geopolitical risk-taking; risk-taking triggers sanctions; sanctions prove you needed bigger buffers. Then the cycle continues.

Deficits, too, can be part of a statecraft apparatus. For the United States, the dollar’s reserve status supports deficit spending, which can be used to fund initiatives (including, right now, a war with Iran).

Release the Karen

You can make an agreement with your neighbor on how to share common spaces. You cannot tell them how to clean their home. But when your neighbor’s neglected plumbing issue floods your basement, the president of the homeowners association gets involved and things get ugly. It is time for the G7 to start acting like the world’s most terrifying homeowners association.

New frameworks from the G7 and IMF are the most serious update to the orthodox playbook in years. The big goals are directionally correct: U.S. fiscal consolidation, Chinese consumption-led rebalancing, and European capital market integration. The institutional proposals in the G7 framework — WTO safeguard reform to cover sectors rather than individual products, expanding WTO trade rules to include trade-adjacent policies like cheap credit and land, and reinterpreting existing WTO laws to provide better trade protection for the purposes of national security — are useful. But both frameworks are reactive, not proactive, and are still asking countries to voluntarily dismantle strategic instruments in exchange for diffuse welfare gains for the commons. No one has bitten on that particular bait in forty years.

The heterodox toolkit is more honest about the need for coercion. Proposals like taxing capital flows, unilateral currency intervention, and price-based disincentives on capital account flows make it much more painful to run a surplus. Pain often works better than asking nicely. A 2019 bill in the U.S. Senate proposed imposing a market access charge on foreign capital inflows administered by the Federal Reserve under a current account balance mandate — the logic being that recycling your surplus into our markets should carry a price.

There is a pragmatic middle ground that combines both approaches. We should target domestic policies everywhere that suppress demand, deliberately suppress exchange rates, fail to support investment, encourage excess spending, distort factor prices, or spill imbalances outward. Michael Pettis points to China’s hukou system as a prime example: by restricting migrants’ urban rights and suppressing wages, it functions as a de facto trade intervention in China’s favor. The only lever we have to fix these imbalances is cost; Countries that can’t get their houses in order should face escalating penalties including restricted market access, capital flow surcharges, financial infrastructure restrictions, calibrated to measurable progress against the underlying domestic policies driving the spillover. Admittedly, restricting access to international markets as a penalty for domestic policies is controversial. But we’re in uncharted territory here.

One of the greatest lessons of the Plaza Accord is that it got countries to act because Congress made the threat of shutting off access to U.S. markets credible enough that Japan agreed to play ball. Credible threat forces cooperation, but threats are only credible when consistently followed-through when countries shirk their commitments. No country surrenders a war chest voluntarily. But countries do respond to incentives. 40 years on, we are still having the same conversation on global imbalances. To make the global economy more resilient and protect the stability of interdependence, we need to act on imbalances and, frankly, it's time for the homeowners association to get involved.1

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The stablecoin vs. central bank digital currency (CBDC) debate is usually framed something like this:

In one corner, the United States! Reigning champion of the regulated dollar-backed stablecoin. After President Trump prohibited federal agencies from establishing or promoting a CBDC, the U.S. has effectively halted work on a digital dollar — betting that private stablecoins can carry the banner of American monetary influence into the future.

In the other corner, China! Centralization nation! After Beijing slammed the door on private crypto, Chinese authorities have advanced a central bank digital currency (e-CNY) and wholesale platform (mBridge) — betting that sheer economic heft will provide China with options and internationalize the renminbi on Beijing’s terms.

The future method of cross-border payments is winner-take-all. The rest of the world sits in the stands, fretting about which pugilist to back. Bets are irrevocable! Dana White is on the South Lawn of the White House screaming, “Choooooose youuuur fighterrrrr and DEAL with the consequences!”

I mean. As much as I’d love to watch an AI-rendered video of two coins duking it out in what would be a manifestation of the ongoing financial cold war between two great powers… this framing does not reflect the reality of how the world is approaching next-generation payments.

While both the U.S. (mostly) and China have picked a path, most other countries are hedging their bets. And so long as each payment method has a viable route through retail and wholesale channels, there is a very probable future where stablecoins and CBDCs settle into some type of coexistence.

Hey neighbor, nice hedge!

Last week, Fed Governor Waller suggested that CBDCs are a “solution in search of a problem” that most major central banks have abandoned. He also said that only the European Central Bank (ECB) and China remain serious about CBDCs. However, the data just doesn’t support him here.

The Atlantic Council’s CBDC tracker counts 146 countries and currency unions — over 98% of global GDP (including the U.S., more on that below) — still exploring central bank digital currencies. Now, many of these are experiments which do not necessarily equate to long-term commitment. But this isn’t just two central banks hammering CBDCs together on their lonesome.

Central banks are staffed by eminently sensible people weighing how to best protect their monetary sovereignty, lower payment costs, and avoid overdependence on either the U.S. or China.

Advanced economies continue to explore CBDCs and tokenized settlement systems while leaving breathing room for private non-dollar stablecoins, though none have yet achieved any significant scale. The ECB has made clear its preference for the digital euro, yet MiCA — the European Union’s landmark digital asset framework — takes a regulatory rather than prohibitive approach to stablecoins, leaving the door open.

Emerging markets, with the flexibility and hope of leapfrogging traditional finance, are leaning into both technologies. Brazil is developing a CBDC called Drex even as dollar stablecoins circulate widely in the country, while Kazakhstan has pursued both a digital tenge and a state-linked stablecoin, describing them as complementary rather than competing tools.

Layer cake

Looking at this debate as a binary between stablecoins or CBDCs loses rich context on how these instruments affect different payment layers and how they can coexist. Theoretically, a government could pursue:

• Stablecoins and retail CBDCs for retail payments

• Tokenized deposits for interbank transactions

• Tokenized reserves for the final settlement in wholesale payments

While stablecoins appear to be dominating consumer payments, remittances, and parts of commercial settlement, most central banks and large multinational banks remain deeply interested in the wholesale layer where financial institutions move massive value across borders and states exercise their monetary authority.

China moved first here. mBridge — a shared ledger built by the central banks of China, Hong Kong, Thailand, and the UAE, and recently joined by Saudi Arabia and Macau — lets participating central banks issue their own currencies directly onto a common platform and settle cross-border payments between foreign banks in central bank money, without correspondents or reliance on SWIFT (i.e. without relying on the West).

The West, however, also has a wholesale contender: Project Agorá. Convened by the Bank for International Settlements and the Institute of International Finance, it brings together seven central banks — the Eurosystem, Japan, Korea, Mexico, Switzerland, the UK, Canada, and (notably) the Federal Reserve Bank of New York — along with more than forty major private financial institutions.

On the Agorá platform, tokenized commercial bank deposits handle the actual transactions, while final settlement occurs in tokenized central bank reserves. These feel very much like wholesale CBDCs, but I guess we’re going to call them tokenized central bank reserves. Unlike mBridge, which tries to cut out the traditional correspondent banking system, Agorá deliberately preserves it. It delivers the same atomic (simultaneous and irrevocable) settlement as mBridge, but keeps everything firmly inside the Western regulatory perimeter. Why aren’t more people talking about this?

Stablecoins probably won’t operate at the wholesale layer, so Agorá theoretically extends the dollar’s reach there and would (combined with tokenized deposits and reserves) round out the West’s options across payment layers. Right now, Agorá isn’t much more than a twinkle in its father’s eye. But the initial pilot proved successful. If deployed widely, it could keep the U.S. the dominant player across all settlement assets and types of payments, which, when combined with deep and liquid markets, makes a compelling system that other countries will be hard-pressed to opt out of.

Everybody hedges, sometimes

Global finance used to mean operating through a small handful of institutions and networks. Now the menu has expanded, shifting some of the decision-making power to those in the hedge. Hedging does come with trade-offs. Interoperability between systems is an open question, and hedging may lead to greater ecosystem fragmentation plus regulatory and compliance costs for financial institutions. The U.S. and China, as the two poles in this system, are most incentivized to pressure countries to pick a side. But whether either nation has the proper leverage remains an open question.

Most countries are choosing not to commit. A few countries have banned crypto and therefore likely won’t be using stablecoins. But maintaining more than one payment rail means that when any single system can be restricted through sanctions or other controls, redundancy protects financial access. Hedging is therefore likely to persist rather than resolve into a single winner. Countries will continue to run stablecoins, CBDCs, tokenized deposits, and wholesale platforms in parallel. We can take solace in the fact that the dollar remains central to this mix not because countries are required to use it, but because its liquidity and reach (now extended with Agorá) make it the most costly system to abandon.1

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On May 22, Iran’s newly established Persian Gulf Strait Authority (PGSA) published an updated map asserting regulatory control over a broad corridor from Kuh-e Mubarak in Iran to south of Fujairah in the UAE. The zone overlaps the territorial waters of the UAE and Oman. All vessels transiting the area are required to obtain prior PGSA authorization, submit ownership, cargo and crew details, and pay fees in Chinese yuan, Bitcoin, or USDT — or be subject to interdiction by the Islamic Revolutionary Guard Corps.

Five Gulf Cooperation Council (GCC) states urged the International Maritime Organization to reject compliance, though Oman opted not to join the coalition. Unsurprisingly Russia and China blocked the United Nations from taking action against Iran. The international response now hinges on a question that sounds technical but is actually civilizational: do we recognize the Persian Gulf Strait Authority as a regulator?

And what happens if we do?

One may smile and smile and be a villain

Iran’s PGSA is engineered to look like an actual regulatory body: permit applications, Vessel Information Declarations covering ownership and cargo, designated transit corridors, and an official X account. Meanwhile, payments to the PGSA are built to evade sanctions. J.P. Morgan estimates the system could generate $70–90 billion annually if normalized. The U.S. Office of Foreign Assets Control (OFAC) FAQ 1249 indicates that paying the toll creates significant sanctions exposure for non-US persons but OFAC will have to aggressively investigate and enforce this, or the threat will be meaningless.

Every other state sitting on a geographic chokepoint similar to the Strait of Hormuz is watching. Turkey controls the Bosphorus. Indonesia and Malaysia flank Malacca. Russia and Belarus could squeeze the Suwałki Gap. If the world accepts the PGSA, everyone can copy the PGSA’s playbook: stand up an “authority,” publish a map, accept yuan and crypto, and dare the international community to refuse compliance while ships queue up at the chokepoint. Or face kinetic engagement. Rinse. Repeat.

Foul deeds will rise

This isn’t the first time a state has collected a toll on a natural feature it didn’t fully control. From the mid-1400s to 1857, Danish kings collected the Sound Dues from every non-Danish ship passing through the Øresund Strait. If you refused to pay, you received vigorous encouragement from the cannons of Kronborg Castle until you did. Around 1600, the Sound Toll was already producing as much revenue for the Danish crown as all of its royal lands combined.

King Eric of Pomerania introduced the dues in 1428 because the Øresund herring fishery had collapsed and he needed the revenue — and because, controlling both shores of the only viable Baltic strait, he could. The toll was rent extraction, justified by geography and enforced by military might. A remarkable fact about a toll is that once people start paying it, they’ll just go on paying it — even after Denmark lost the eastern shore to Sweden in 1658, stripping it of full geographic control, the dues continued for another 199 years!

The Sound Dues met their demise in 1857 at an international trade conference, after sustained pressure from the maritime powers tired of paying the toll (it only took them 400 years). If only all trade conferences were this exciting! Denmark accepted a buyout of 33.5 million rigsdaler, roughly a year’s worth of Danish state expenditures at the time, and abolished the dues by treaty at the Copenhagen Convention. Over the centuries, the Sound Dues had triggered multiple wars and played a major role in Danish foreign policy.

King Eric and his successors proved, not for the first time nor the last, that a credible threat of military force can extract rent from a chokepoint a country doesn’t fully control, and that these rents can become embedded over time. And the longer rent extraction continues, the more it costs rentees in lives, treasure, or diplomatic will to make it stop. Both Iran and the Gulf States have something to learn from the Sound Dues.

Take arms against a sea of troubles

For Pete’s sake, I hope it doesn’t take us another 400 years to form an anti-toll coalition. Thankfully the other Gulf states are having none of it. To reduce Iran’s leverage, its oil-producing neighbors are faced with a problem: how to divert the more than 20 million barrels of oil per day that would typically flow through the Strait of Hormuz through different delivery routes. Saudi Arabia ramped its East-West Pipeline to full capacity at 7 million barrels per day. The UAE is expanding its Habshan-Fujairah pipeline. Iraq’s Kirkuk–Ceyhan line reopened after a decade of idleness (one imagines this came as a shock to the spiders who set up webs in the nice empty pipe). In aggregate, these cut into but won’t replace Hormuz’s capacity. More action is needed to nip the PGSA in the bud and save ourselves from a dozen other copycat fake regulators or rentiers.

Don’t recognize the regulator: The Gulf states’ (minus Oman) letter to the International Maritime Organization is only a first step in fighting Iran’s fake regulator. As the Sound Dues showed, once a rent is embedded, recognition keeps it alive — and dislodging such a rent takes generations. On May 27, OFAC designated the PGSA. While this means that the U.S. government, at least, is serious about policing the toll (see below), in a way it gives the PGSA legitimacy (by stooping to acknowledge it, though there is liberal use of “so-called strait authority” in the press release) which is a template we want to avoid.

Police the payment rails aggressively: OFAC’s FAQ 1249 and subsequent May 1 Alert make it clear that payments to Iran’s Strait Authority are barred under Executive Order 13902, with secondary-sanctions exposure for foreign banks that facilitate these payments. Enforcing the EO against yuan intermediaries and crypto wallets would give teeth to the continued non-recognition of the authority.

Invest in redundancy: By imposing a toll upon the Strait, Iran has revealed to the international community how much pain it can inflict upon a whim. Diversification away from reliance on the Strait is necessary: more pipelines, expanded oil terminals, alternative suppliers. Ideally the PGSA’s revenue projections collapse and Iran settles for a buyout, similar to the collapse of Denmark’s Sound Dues.

Geography is destiny, sure. But it feels a bit medieval to let a country start charging tolls on the entire international community to navigate a natural strait. King Eric of Pomerania would be proud but theoretically we’ve evolved past 15th century methods of governance. Unless the world’s maritime states take action to stop the recognition of Iran’s Persian Gulf Strait Authority, there’s no telling how many other countries with a similar natural chokepoint might start salivating over the hoards of treasure to be collected by parking a short-range ballistic missile on a beach.1

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We know what has made the dollar dominant — economic size, deep capital markets, institutional credibility, geopolitical reach, network effects. These pillars are well understood. But we don’t pay enough attention to how we measure dominance.

The conversation around dollar dominance normally defaults to reserves. Central banks around the world have cut U.S. dollar reserves from 70% of total foreign exchange (FX) reserves in 2000 to 57% in 2025, and pundits read this as terminal decline. But reserves are only one of three distinct roles the dollar plays and arguably the least diagnostic:

1. The dollar is the world’s vehicle currency.

2. The dollar is the world’s funding currency.

3. And, despite some erosion, the dollar is still the world’s dominant reserve currency.

Gopinath and Stein showed that the vehicle and funding currency roles form a self-reinforcing loop: trade invoiced in dollars creates global demand for safe dollar assets, which lowers the cost of borrowing dollars. Exporters then invoice in dollars to match their dollar liabilities with dollar revenues, and the cycle reinforces itself. Reserves correlate strongly with these other roles — central banks tend to hold the currency their economies invoice and borrow in — but the causation runs through trade and finance, not the other way.

Erosion in one role doesn’t automatically cascade into catastrophic failure in the others, but it can destabilize the dollar ecosystem. To diagnose dollar dominance honestly, we have to watch all three.

Vehicle currency: the dollar remains durable

When two countries love each other very much... Ahem. Sorry. When two countries engage in trade or some sort of cross-border transaction, they have to decide what currency they’re going to use in the transaction. Is someone handing over a fistful of euros? A suitcase of yuan? A troy ounce of gold dust (God forbid)? No, more likely than not, dollars will change hands.

The dollar is the world’s vehicle currency in two complementary senses. First, in trade, it’s the currency that exporters and importers invoice in, even when neither is American — this is known as the dominant currency paradigm. Second, in FX markets, it’s the bridge currency that connects all other currency pairs. It’s cheaper to go from Korean won to USD to Brazilian real than directly from won to real. This is another example of a dollar-reinforcing cycle: trade invoiced in dollars generates dollar FX activity, and a dollar-centric FX market makes dollar invoicing cheaper through tighter spreads.

I would argue that this is the most durable measure of dominance. According to the BIS Triennial Survey, 89% of all foreign exchange transactions still involve a dollar on one side. The SWIFT data tells a similar story: USD’s share of cross-border messaging traffic has held steady around 48–50% for the past three years. According to IMF research, a large share of USD payments occur between third-country originators and beneficiaries — meaning the U.S. is involved on neither end of the transaction — the textbook sign of a vehicle currency.

This data is notoriously difficult to aggregate, and we must rely on proxies such as the SWIFT data to estimate currency composition of trade invoicing. A group of IMF economists hand-assembled a 132-country panel, which is likely the most robust data set available, and they noted that the dollar accounts for an average of 49% of export invoicing, several times the U.S.’s actual share of world trade. The available proxies are also missing some flows such as those between Russia and China in RMB, non-SWIFT transactions on China’s CIPS system, book-to-book transfers, and crypto. But for now, those transactions are still small in the scheme of global payments. SWIFT, on average, sent 51 million messages a day in 2025, while CIPS averaged around 36,000 daily transactions.

What explains the dollar’s durability as a vehicle currency? Network effects. Krugman showed in 1979 that vehicle currency status is self-reinforcing: the more a currency intermediates transactions, the deeper its markets, the lower its transaction costs, the greater its appeal. Displacing a dominant vehicle currency requires a degree of volume that no other currency can muster. However, new payment systems (CIPS), their linkages (fast payment bilateral connections), and new technologies (CBDCs) all have the potential to shrink transaction costs and lower barriers to entry to transaction intermediation for other currencies, so beyond just volume we have to keep an eye on what other countries are building.

Funding currency: sticky, but rate-sensitive

A funding currency is what the world borrows in. Ghana issues bonds in dollars because global investors don’t feel great about holding cedi. A Brazilian firm borrows dollars at rates a reais-equivalent bond can’t match. A multinational raises dollar debt to match dollar-denominated revenues from global operations.

The BIS data shows USD at 45.7% of international debt securities outstanding in 2025-Q4. EUR sits at 40%, GBP at 7.5%, RMB under 1%. These shares have barely moved in a decade. Even with sanctions, BRICS rhetoric, and explicit de-dollarization policy, the composition of international debt has not shifted. Everyone borrows in dollars because, well, because everyone else borrows in dollars — which creates deep and liquid markets, which makes it cheap to borrow in dollars, which reinforces the cycle. Breaking that equilibrium would require a credible alternative, and no other currency comes close.

But funding is the most rate-sensitive of the three roles. When dollar rates stay elevated, the cost advantage over other currencies narrows. Mozambique is reportedly in talks to convert dollar debt to RMB at a likely 200bp discount. With the U.S. 10-year note nearing 5%, more emerging-market borrowers eye debt conversion to keep their debt servicing costs low.

Reserve currency: geopolitical troubles

This is where the conversation usually starts and ends. Central banks have cut dollar reserves from ~60% of total reserves (all assets) in 2000 to ~40% in 2024. Okay. That is a meaningful erosion, I admit, but what replaced those dollars?

Mostly gold. Gold now accounts for roughly 25% of global central bank reserves, up from under 10% two decades ago, with central bank gold demand hitting record highs in 2025. It is not controversial to say that the freezing of Russia’s dollar reserves in 2022 accelerated the shift toward gold, and now even non-sanctioned countries hedge against the dollar (or more accurately, hedge against exposure to the U.S. government’s conditions for holding dollars).

But gold can’t invoice a trade, fund a bond, or clear a payment. It’s a geopolitical hedge, not a rival currency. A Korean exporter still settles in dollars regardless of whether Brazil’s central bank holds gold or dollars. If central banks were shifting from dollars to euros or renminbi — that is, to other transacting currencies — that would be more concerning. Reserve accumulation is generally a reflection of what currencies a country’s central bank collects when their exporters trade. A shift from dollars in reserves to other fiat currencies might suggest that the dollar is being used less in trade invoicing.

So yes, the data show that the share of reserves is eroding, but in a way that doesn’t meaningfully threaten the primacy of the dollar’s other two roles yet. Keep in mind that Eichengreen, drawing on historical precedent, reminds us that reserve currency transitions are notoriously slow. The pound sterling did not vanish from reserves when Britain’s political hegemony declined in the twentieth century; it took generations to erode. However, it’s far too soon and hazy to say with any confidence that dollar reserves are irreversibly eroding in a similar fashion.

I’ll let you know when my local dive lets me buy a round of Miller High Life in gold.1

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If you’re anything like me, you’re still reeling from the latest installment in the “death of the dollar” cinematic universe (RIP the petrodollar) but I’m sad to report that you must emotionally prepare yourself for another wave. Next week, the BRICS foreign ministers are scheduled to meet in New Delhi ahead of the bloc’s annual summit in September.

As always, intra-bloc payment connectivity and trade settlement will be on the agenda. As always, the foreign ministers will likely produce vague statements about doing something — anything! — about the dominance of the dollar. Headlines about de-dollarization will follow and counterfactuals will be published.

In theory, the BRICS are inching closer to a functional decentralized digital payment system that routes around the dollar entirely. In practice, I’m not so sure. I read the strategy docs for BRICS Pay and found a familiar face acting as a “temporary” bridge currency for the bloc. If you guessed a dollar-backed stablecoin, you were correct. The dollar is so strong that even when building a mechanism to route around the dollar, one must still resort to using an ersatz dollar.

You wonder how the BRICS nations could allow this, but the reality is they may not have much of a choice because of the dollar’s role as a vehicle currency. Let’s take a look at the BRICS and why the dollar is still at the center of it all.

BRICS to I ICE BRUISES

In 1998, Russian foreign minister Yevgeny Primakov took a trip to New Delhi, where he mused about a multipolar future, when India, Russia, and China might create a counterweight to the United States. It took another three years for the BRICs acronym to catch on via a paper by Goldman Sachs Chief Economist Jim O’Neill, titled “Building Better Global Economic BRICs,” which forecasted the expected outperformance of the Brazilian, Russian, Indian, and Chinese economies over the G7 economies. Over the next decade, BRIC countries began to meet on the sidelines of diplomatic forums, at first informally and later officially.

The bloc now includes South Africa (BRICs to BRICS) and more recently Ethiopia, Iran, Egypt, Saudi Arabia, the UAE, and Indonesia accepted invitations (BRICS to “I ICE BRUISES”). Okay, my acronym doesn’t really capture growth potential the way O’Neill’s did but it certainly captures their mood of resentment. The BRICS now account for 40% of global GDP. This is serious economic heft and they’ve been on the move:

• They’ve launched serious initiatives: the New Development Bank was inaugurated in 2014 as a counter to the IMF and World Bank, and has approved a total of $40 billion in financing over a decade (with $22.4B disbursed). Peanuts compared to the World Bank’s $161B in 2025 alone, but not nothing!

• They’ve become more integrated. According to the United Nations, “Intra-BRICS merchandise trade has expanded more than 13-fold since 2003. Exports reached $1.17 trillion in 2024.”

• And they love to talk about payments. Which is why people have a de-dollarization field day when foreign ministers inevitably issue a joint statement about advancing payment initiatives in local currencies.

People always speculate about the creation of a BRICS currency but that is about as realistic as me making it on Broadway (experts are pegging the odds at “not particularly likely, but some local theatre may be looking for someone to play the goat from Wicked”). The Europeans share millennia of proximity, history, culture, and still can’t figure out a monetary union. A unified currency for far-flung countries with nothing but an acronym in common is, on a good day, highly improbable.

But a shared currency isn’t the only avenue to financial integration! Other initiatives include: BRICS Bridge, the bloc’s concept project for a multicurrency central bank digital currency wholesale settlement platform, and a focus of India, this year’s BRICS chair; BRICS Clear, a decentralized cross-border securities settlement and depositary platform for financial markets; and finally, BRICS Pay, which is the retail and commercial layer. Out of the lot, BRICS Pay is the bloc’s most developed alternative to Western systems, but digging around in the strategy documentation, we find that it’s an awfully familiar story.

Definitely not anti-dollar

The BRICS Pay website boldly declares: “Not anti-dollar - we are for de-domination.” (My “Not opposed to the dollar” T-shirt has people asking a lot of questions already answered by my shirt.) Which tells us a lot. BRICS Pay is a decentralized payment ecosystem developed by the bloc’s private sector coordinating body to enable cross-border transactions between BRICS countries in local currencies, without routing through Western financial infrastructure.

In 2018, the project got underway around a core piece of technology called the Decentralized Cross-border Messaging System (DCMS), developed by researchers at St. Petersburg State University. Russian-made, so we can assume it is overbuilt and grudgingly functional. In 2024, a working prototype was demonstrated at the BRICS Business Forum in Moscow, where 5,000+ attendees could top up a digital wallet and make QR code payments at venues in the World Trade Center.

The 2025 BRICS Pay Annual Report (bedtime reading!) put BRICS Pay under discussion, which likely means no consensus was reached on next steps. But given the desire to show that they’re making progress, I anticipate BRICS will make some announcement this year about the continued development of the payment system.

Under the hood

BRICS Pay connects existing national fast payment systems — Brazil’s Pix, India’s UPI, Russia’s SBP, China’s CIPS — through DCMS which at its core is a decentralized messaging system. Much like SWIFT, DCMS moves payment instructions between banks, not money itself. Unlike SWIFT, there is no central owner who can kick a country out, which is rather the point. This point is explicitly made in the technical documents, which have the air of a rejected nightclub-goer opening a new club across the street.

Functionally speaking, let’s say a Brazilian soy exporter wants to get paid by a Russian buyer in local currencies. The bank of the buyer in Russia creates a payment instruction and sends it to the DCMS network, where it hops through chains of intermediate nodes — like a flight with layovers — until it reaches the Brazilian bank on the other end. Each node signs the message cryptographically before passing it on. If it reaches the end intact, money starts moving; if anyone tampers with the message, the signature breaks and the transaction cancels automatically.

But before money can move, the two banks must first have established an Agreement (very technical terms, again very Russian), in which banks establish what currencies they are willing to hold and how much liquidity in said currencies. This is basically a bilateral credit line. No agreement means no transaction. So BRICS Pay is still a series of bilateral currency transactions between banks, just routed away from Western institutions on a Russian messaging system.

Away from the dollar and right back onto the ~dollar

BRICS Pay’s own strategic roadmap publicly admits, albeit buried deep on a website titled docs.brics-pay.com, that for B2B transactions, the system relies on the “temporary use of USDT as one of the bridges.” USDT being……… Tether, a stablecoin pegged one-to-one to the US dollar. Incredible. The system designed to escape the dollar is routed through an artificial one. Documentation is light but we’re guessing Tether is functioning as a conversion mechanism — instead of an illiquid and expensive direct conversion from rupee to reais, the conversion goes from rupee to USDT to reais. In other words, USDT sits in the middle of transactions as a common denominator.

The reason a bridge currency is needed at all goes back to what Paul Krugman identified in 1980 as the vehicle currency — the dominant currency that sits in the middle of global trade because routing through it is simply cheaper than converting directly. Look at the spreads in the chart below. The USD/INR spread is razor thin. The BRL/INR spread is nearly eight times wider. That gap is basically an extra tax on the transaction. Converting between two non-dollar currencies directly is expensive precisely because there are no deep, liquid markets for most BRICS currency pairs — not enough two-way flow to attract market makers willing to quote tight prices at scale. Until then, the dollar — or an ersatz version of it — stays in the middle.

And then there is the China problem. USDT is banned in China: Beijing outlawed cryptocurrency trading in 2021. There does seem to be an exception for government approved projects, but who knows what that means. The strategic vision laying out Tether’s role was published in September 2025, so it’s possible the BRICS Pay plumbing has since evolved. However, as written, the bridge currency for the bloc’s payment system is illegal in the bloc’s largest economy. The “government-approved projects” exception could be the saving grace, but again, who knows!

When will I be able to BRICS Pay for a Chipotle burrito?

Don’t hold your breath. BRICS began as an acronym coined by Goldman Sachs economists, and the bloc has spent two decades trying to grow into it. 40% of global GDP and $1.17 trillion in intra-bloc trade is real weight. But economic weight alone doesn’t make monetary and commercial integration easy. Again, the Europeans had millennia of shared history and are still working out their differences.

As for the payments system designed to liberate them from Western oppression? Phase 3 (2028-2030) of BRICS Pay plans to retire USDT in favor of CBDCs, while beginning to explore a universal unit of account for the bloc they are calling the BRICS Unit. Candidates for backing the unit include commodity bundles and tokenized energy. In other words, they plan to replace a “temporary use” dollar-pegged stablecoin with CBDCs in development, and eventually something else, anything else.

Just don’t ask them what.1

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International bond markets have some A+ branding. I say “international bond market” and you go zzzzzzzz. But I say “komodo bond” (a bond issued by a foreign entity in Indonesia) or “masala bond” (the same for India), and suddenly you have a powerful urge to apply to grad school for economics. China has two incredible ones: “panda bonds” for RMB-denominated bonds issued in China and “dim sum bonds” for RMB-denominated debt issued abroad or in Hong Kong or Macau. So good. And last month there was an intriguing first in China’s dim sum bond market. In mid-April, the Government of Portugal sold an eight-year, 1.99 billion yuan ($292 million) offshore RMB dim sum bond in Portuguese markets. A first for a euro-area sovereign.

Capital markets are vast and Byzantine, but the core idea is that they are the mechanism used to put capital to work. Instead of leaving a big pile of cash in a checking account, you buy bonds or equity from someone (who needs the debt to build a highway or data center or railroad), which earn more or less interest depending on risk. These markets are the beating heart of currency internationalization. For a bond to be RMB-denominated means the principal and interest will be paid back in Chinese renminbi (versus paid back in U.S. dollars for a dollar-denominated bond).

The offshore dollar system — eurodollars and dollar bonds issued outside the U.S. — created a vast, self-reinforcing ecosystem of dollar demand that exists outside of Washington’s direct oversight and control. China wants elements of that for the RMB — deeper offshore liquidity, broader adoption, and options for its currency — without sacrificing oversight. Beijing’s obsession with control is why the capital account (investment flows, rather than trade flows) stays mostly closed.

Dim sum bonds and RMB eurobonds help address the tension between control and expansion. They build global familiarity with the yuan among traders, investors, and eventually central banks, without compromising capital account control. Researchers at the Bank for International Settlements and Hong Kong Monetary Authority showed that offshore markets effectively let non-residents hold another country’s currency, taking on currency risk (the RMB goes up or down), while largely escaping country risk (Beijing suddenly imposing capital controls, freezing accounts, or changing the rules). The ability to divorce country risk from a currency makes that currency far more attractive globally.

Each new dim sum bond or RMB Eurobond deepens the RMB offshore market and each new panda bond deepens the appetite for access to Chinese capital. This is how reserve currencies are built.

Where bonds are being issued

Since 2015, $885 billion in RMB-denominated international bonds has been issued in nearly 40,000 deals — running at a $195 billion annualized pace in 2026, on track to surpass last year. RMB-denominated bonds come in four distinct structures, each with different issuers and investors.

Much like dim sum, China’s international bonds come in many flavors (four main ones):

Pork. Haha. Just kidding.

Foreign dim sum bonds are issued in Hong Kong and Macau and make up the largest segment at $348 billion. Over 80% of the foreign dim sum bonds are issued by Chinese state issuers (more on this later).

Eurobonds are most attractive to Western institutional money that prefers familiar paperwork and clearing methods. Eurobonds are typically governed by English law, listed on the Luxembourg or London Stock Exchange, cleared through Euroclear/Clearstream, and generally exist outside China’s regulatory control. Despite totaling $299 billion across 37,230 deals, growth in issuance of Eurobonds has flatlined around $30ish billion annually since 2022, as they struggle to compete with the Hong Kong market’s deeper liquidity.

Domestic dim sum bonds are RMB paper sold by issuers in their home country (i.e. not China) with a total issuance of $62 billion over the last decade. This segment is worth watching because it builds demand for RMB paper outside of Hong Kong and China. The largest participant is Russia, whose exclusion from the dollar financial system has driven over $15 billion in issuance since 2022.

Panda bonds are debt issued by foreign entities inside mainland China, running at $172 billion over the last few years and growing — a sign that issuers see Chinese investors as important sources of capital. Of that $172 billion, probably around $50 billion was issued by truly foreign entities. The rest comes from Chinese and Hong Kong-parented companies incorporated offshore (largely Chinese property developers using Cayman Islands and BVI holding structures). We included these in the analysis to capture the largest possible size of the market. Yes, these are onshore while the rest of the market we’re talking about is offshore, but panda bonds are an important part of the RMB international bond ecosystem because they simultaneously open up China’s bond market and expand the scale of RMB-denominated financial assets in global markets.

Who are the issuers?

The breakdown of all RMB bond issuance is as follows:

• 58% from mainland Chinese entities

• 9% from Hong Kong

• 33% from the rest of the world

Let’s first discuss the Chinese entities’ motivations. The People’s Bank of China has issued over $200 billion in Hong Kong alone, with single deals now topping $8.8 billion. Yes, $200 billion is small peanuts in the capital markets game, but if you take a step back, Beijing is building the muscle to deepen its international capital market through a few mechanisms:

• Benchmark yield curve. Offshore investors need a risk-free reference rate to price all other RMB assets against. By issuing offshore RMB bonds, Chinese state entities establish a benchmark yield curve and help other foreign issuers know what pricing is fair.

• Depth. Chinese state entities are creating depth by ensuring high-quality assets for the growing pools of yuan accumulating in Hong Kong through trade settlement, keeping that currency circulating offshore rather than converting back into U.S. dollars.

• Spread. Finally, issuing offshore debt allows the Chinese government to manage the spread between onshore (CNY) and offshore (CNH) yuan.

China does not want the RMB to replace the dollar. However, Beijing wants alternatives and will need a deep, liquid offshore RMB ecosystem before the currency can do all the government wants it to. Work by Menzie Chinn and Jeffrey Frankel confirms that the depth and liquidity of a currency’s primary financial center are among the strongest predictors of reserve-currency status. For the RMB, Hong Kong’s offshore market plays that role.

So which other countries are issuing bonds in RMB and why? We see three distinct groups and motivations.

Note: the sovereign portion under the United States is not the U.S. Government issuing dim sum bonds but rather the multilateral institutions like the International Finance Corporation (headquartered in Washington, D.C.) issuing RMB-denominated debt.

Sovereigns. The smallest tier by volume is sovereign nations. The Philippines has issued RMB bonds twice. Poland, Egypt, and Slovenia all have sold paper in the panda market. Hungary is the most frequent flyer, issuing panda bonds six times since 2017, with the coupon falling from 4.85% to 2.5%. Chinese government bond yields have fallen steadily while U.S. rates surged. By 2023, the gap between U.S. 10-year Treasuries and Chinese 10-year government bonds had inverted to roughly 150–200 basis points — the largest such reversal in history — and has since widened further, with China’s 10-year bonds currently yielding around 1.75% against U.S. Treasuries above 4%. For a sovereign borrower that holds reserves in dollars but spends in local currency, locking in RMB funding at sub-2% rates while the dollar alternative sits above 4% represents shrewd accounting more than a geopolitical statement.

Portugal has now come to the RMB bond market twice, in two different categories. These deals are rarely above $500 million, but are important for two reasons. First, with panda bonds, it shows that countries like Portugal recognize the Chinese market is important for growth, and generally investors (prospective Chinese investors!) want to hold investments in their own currencies. And for Portugal’s domestic dim sum, they are building a constituency in Portugal for continued RMB engagement — which presumably signals a growing financial and economic entanglement between the two countries.

Wall Street and the City. U.S.-parented corporate entities account for $45 billion — the largest single non-Chinese bloc. This is mostly the U.S. financial sector: Goldman Sachs, Citigroup, Merrill Lynch, JPMorgan, and Morgan Stanley issuing RMB debt through their European and Hong Kong entities, tapping two pools of RMB demand simultaneously. UK-parented entities add another $25.3 billion. These are largely financial intermediaries using RMB as a funding currency for their Asia operations, not ideological converts to yuan finance.

German industry. Germany is the largest non-Chinese user of the panda bond market by a significant margin — $25 billion in panda bonds when measured by parent domicile. Mercedes-Benz has issued panda bonds every single year since 2015. Volkswagen, BASF, and Bayer followed. Mercedes-Benz issues panda bonds because China is an incredibly important export market and the company wants its debt in the same currency as its revenues. This is a durable form of RMB adoption because it is entirely apolitical, driven purely by the economic heft of China and the importance of the Chinese consumer to foreign demand. Other corporations are showing up here as well. Again, and in addition to operational hedging purposes, the yield differential is powerful: if you can raise debt 200bps lower in RMB, what business wouldn’t make that decision? It’s also interesting that KFW, the German development bank, has been a large user of the RMB Eurobond market to the tune of $9.7 billion.

Step by step

$885 billion of RMB International bond issuance sounds significant until you remember that 58% of that volume is China selling to itself and the rest is mostly Wall Street doing treasury operations. Genuine foreign adoption is a much smaller number, and wow does it pale in comparison to USD liquidity. But panda and dim sum bonds grow every year, and the cost of entry to new issuers falls every year, both of which are small increments in China’s favor.

For all the furor over the petrodollar and petroyuan in recent weeks, it’s important to keep our eye on the ostensibly boring but wonderfully branded structural stuff happening elsewhere!1

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The Central Bank Governor of the United Arab Emirates, in a moment between an Iranian missile buzzing over his head and the umpteenth drone attack on his gas fields, must have looked up and said, hey, we’re going to get paid for this, right?

The Wall Street Journal reports:

U.A.E. Central Bank Gov. Khaled Mohamed Balama raised the idea of a currency-swap line with Treasury Secretary Scott Bessent and Treasury and Federal Reserve officials in meetings in Washington last week, the officials said.

Swap lines are being selectively offered and openly negotiated. Which decision-makers in Washington grant them and through which mechanisms will dictate the long-term integrity of the dollar system. Let’s examine the options on the table.

A brief history of U.S. liquidity assistance

When we talk about liquidity, we’re talking about the free flow of U.S. dollars in the global economy. Liquidity is like gasoline in an engine. If parts of the global economy run out of dollars, the engine seizes up and financial transactions fall apart. To prevent this, the U.S. maintains several dollar liquidity tools for different purposes.

Central bank liquidity swap lines

The U.S. Federal Reserve’s central bank swap lines are the most powerful tool in the Fed’s toolbox. Swaps allow the Fed to lend out U.S. dollars to foreign central banks in exchange for local currencies as collateral. Foreign central banks can then deploy those dollars domestically, and at a specified future date, repay them to the Fed at the same exchange rate. This is not charity. Central banks who activate their swap lines pay a market-based interest rate to the Fed. Fed swap lines create a clean, collateralized transaction that keeps dollar liquidity flowing uninterrupted like the swallows of Capistrano.

The use of swap lines by the Fed has evolved across three distinct periods: 1) protect the U.S. gold stockpile, 2) defend the stability of the dollar, and 3) save the world.

1. Protect the gold stockpile: The Fed first established swap lines in 1962 to stave off a run on the U.S. gold stockpile. Under the Bretton Woods system, foreign central banks had the right to convert dollars into gold at $35 an ounce. As U.S. spending grew, by the early 1960s outstanding dollar liabilities exceeded the amount of gold the U.S. held. The Fed deployed swap lines to get local currencies from foreign central banks, then used those currencies to buy back unwanted dollars and forestall gold conversion requests. It felt like a house of cards. Turns out it was! Once Nixon faced the music and ended gold convertibility, it cost the Fed and U.S. Treasury a combined $2.5 billion to unwind the arrangements.

2. Defend the stability of the dollar: After Bretton Woods collapsed and gold convertibility was no longer an issue, swap lines were repurposed for currency stability. With many currency exchange rates now floating, the Fed used swaps to finance foreign-exchange interventions, using foreign currencies to buy the dollar when it was depreciating too fast or giving foreign banks dollars to sell when it was strengthening too fast. 85% of U.S. drawings involved German marks as the world’s second most important reserve and trading currency at the time. By 1980, the Fed had stopped using the lines for intervention and wound down the G10 facilities in November 1998 as half of these countries prepared to give up their national currencies for the euro. The last artifact of this era was the 1994 North American Framework Agreement (NAFA) swap lines with the Bank of Canada ($2 billion) and the Bank of Mexico ($3 billion) — financial backstops to our largest trading partners, and subject to annual renewal by the Fed. Both still exist: Mexico last drew on its Fed line in 1995; Canada never has.

3. Save the world: The modern era of swap lines began after 9/11, when the Fed established temporary 30-day swap lines with the European Central Bank (ECB) ($50 billion), the Bank of England ($30 billion), and the Bank of Canada (raised the NAFA line from $2 billion to $10 billion). The lines expired after a month. This era kicked into high gear in 2007, when the Fed authorized lines with the ECB and Swiss National Bank as dollar funding markets tightened during the Global Financial Crisis. Now the Fed was firmly the world’s lender of last resort. The swap network expanded to 14 central banks by late 2008, contracted, then was reauthorized for five central banks in 2010 during the European sovereign debt crisis. In December 2008, lending through swap lines peaked at $580 billion. In 2013, those five lines — with the Bank of England, ECB, Bank of Japan, Bank of Canada, and Swiss National Bank — were converted into standing arrangements with no expiration date. During COVID, the Fed reactivated temporary lines with the same 9 other central banks that had received them during the Global Financial Crisis — lending reached $470 billion in May 2020 and those temporary lines expired in 2021.

Foreign and International Monetary Authorities (FIMA) Repo Facility

In 2020, the Fed established and later made permanent the FIMA Repo Facility — which allows central banks holding U.S. Treasuries in custody at the New York Federal Reserve to temporarily exchange their Treasuries for dollars through overnight repurchase agreements. This tool is basically like the U.S. letting other central banks borrow gasoline overnight with a barrel of oil posted as collateral. The FIMA facility is collateralized by Treasuries, carries no foreign exchange risk to the Fed, but central banks must apply to use it. The Fed doesn’t always want to carry everyone’s fun-sounding currencies on its balance sheet (the ngultrum, the quetzal, the dong), so this is a way for central banks that don’t qualify for a swap line to access dollar liquidity.

Exchange Stabilization Fund

The third major instrument is the Exchange Stabilization Fund (ESF). Created in 1934 under the Gold Reserve Act, the ESF is managed by the Treasury Secretary with minimal congressional oversight. This is like a roving fuel truck that shows up wherever gas is needed, with less capacity but fewer restraints. The ESF’s role has expanded over the years and has been used to intervene in foreign exchange markets, extend credit to foreign governments, and backstop domestic financial markets. It backed Mexico in 1995, guaranteed U.S. money market funds during the 2008 crisis, and supported the Fed’s emergency lending programs during COVID. The ESF currently holds approximately $218 billion in total assets, though as of right now only $44 billion is uncommitted — with most assets tied up in IMF reserve assets and various foreign currencies — limiting its impact.

Argentina, the UAE, and swaps as “deal guy” tools

The United States is now entering our fourth era of dollar liquidity assistance: deal guy tool. In case you’re less online than I am (bless you), there’s lots of talk on how the U.S. has thrown established processes out the window in favor of the deal guy — entrepreneurial and unburdened by what has been. Is liquidity assistance a deal guy tool?

In 2025, the Trump administration extended a $20 billion currency swap to Argentina’s central bank through the ESF. The U.S. Treasury used the ESF to purchase Argentine pesos on the open market. This was the first large-scale U.S. financial rescue of a foreign economy since the ESF’s $20 billion loan to Mexico in 1995. More importantly, it was the first explicit use of the ESF tied to the electoral victory of a foreign political party (Milei’s La Libertad Avanza). The precedent set by Argentina creates a new dynamic: countries now understand that liquidity assistance from the United States is negotiable and tied to their relationship or cooperation with the U.S. Surely others will come to our door, hat in hand.

Cue the UAE! Now this case is a real sticky wicket because the UAE’s currency, the dirham, is pegged to the dollar, and backed by approximately $270 billion in foreign currency reserves. While the country is under financial strain and missile attack, it hasn’t experienced catastrophic dollar shortfalls from the Iran conflict. Yet the UAE Central Bank Governor still raised the possibility of a swap line in Washington with both the Treasury Secretary and Federal Reserve officials. Abu Dhabi likely recognizes that Washington is shifting into its deal guy era. It was widely reported that the head of UAE’s central bank noted that, without access to dollar liquidity, they may have to switch to denominating oil contracts in Chinese RMB — I mean, this is just classic negotiating leverage. The art of the deal, as it were.

Secretary Bessent came out this week supporting aid for the UAE. He also noted that numerous countries from the Middle East and Asia have requested swap lines. Given this support, we can only expect this kind of behavior to increase and the administration is going to need a plan for how to triage these requests.

Keep the Fed lines sacred…

American economic historian Charles Kindleberger, in his cheery tome The World in Depression, argued that global economic stability requires a hegemon willing to perform three functions: maintain a market for distressed goods, provide countercyclical lending, and act as lender of last resort. The failure of the interwar period, in his analysis, was not the absence of a capable hegemon but the absence of a willing one. The United States, having displaced Britain as the dominant economic power, was not yet prepared or willing to bear the systemic responsibilities that role demanded.

The Federal Reserve’s standing swap lines are the modern institutionalization of the lender-of-last-resort function. Their value comes from the fact that they are provided to banks of systemic importance to the global financial system, not political importance.1 The promise of stability and follow-through from the U.S. has reinforced the dollar’s dominant position. Strip away that promise, and the instrument loses its stabilizing power and undermines confidence in the dollar system.

As one hypothetical, imagine a global liquidity squeeze stemming from any of the numerous risks facing the global economy right now (private credit, supply shocks, etc.). One of the five central banks that have standing access to Fed swap lines might tap them to smooth funding issues. But what if the U.S. made swap lines for, let’s say, the European Central Bank contingent upon Europe sending troops to help us open the Strait of Hormuz? The Europeans might comply at first, to avoid a banking crisis, but that’d be the beginning of the end for the offshore dollar. Others would stop treating dollar liquidity as a reliable public good very quickly.

However, we now live in an era of great power competition. Perhaps the rules do need to change. In 2008, the Fed noted that countries that received a swap line had economic size sufficient enough to cause global spillovers, a track record of sound macroeconomic policy, and a specific dollar funding problem that a swap line could plausibly address. In 2026, might the Fed consider adding swap line criteria to include countries that actively advance and maintain dollar dominance? The Fed would need to be very explicit about what counts as sustaining dollar dominance, otherwise it would devolve into an “I’m Spartacus” situation of countries explaining why their country is particularly important to sustaining the dollar’s role.

…And lean into the other tools

The firewall between the Fed’s swap lines and Treasury’s liquidity diplomacy needs to be maintained and made explicit. The ESF, however, is a different animal and should be used as such. Bilateral liquidity assistance from Treasury through the ESF or other mechanisms is a legitimate instrument of foreign policy. Using it to support allies, to advance strategic objectives, or to provide targeted assistance where the Fed’s mandate doesn’t reach is entirely defensible. The problem arises when the political logic of ESF-style arrangements begins to bleed into the Fed’s decision-making. The discussion of who gets a central bank liquidity swap line needs to happen at the Fed, and not meander over to the White House.

The FIMA Repo Facility should be actively promoted as the appropriate channel for countries like the UAE with substantial Treasury holdings seeking precautionary dollar access. The facility is collateralized, low-risk, and does not require FOMC approval or political negotiation. Countries that qualify should be encouraged to use it, rather than seeking deals that carry political costs on both sides.

Dollars, dollars everywhere

The global financial system is awash with dollars at a scale that is difficult to comprehend. Ever since the extraordinary monetary and fiscal interventions of the Global Financial Crisis and COVID, global markets have grown used to a world where dollars are abundant, accessible, and — crucially — expected. The Fed’s balance sheet went from roughly $900 billion before 2008 to a peak of nearly $9 trillion in 2022 (roughly at $6.7 trillion today).

To extend the gasoline metaphor, the problem facing foreign governments isn’t really whether gas is available, but what gas station they want to patronize and at what cost. We should not halt liquidity diplomacy, that ship has sailed. But to preserve the credibility of the dollar, we must be ruthless about which U.S. institution is providing liquidity assistance and why. The ESF is Treasury’s tool of choice — Treasury’s leadership changes with administrations and its choices should reflect foreign policy. Congress can always allot it more funds. But the Fed’s swap lines are a hegemonic stabilizer that no other central bank is willing or able to offer. Yes, there is a question of whether the Fed should revisit its swap line criteria to include systemic dollar users, but otherwise it needs to protect swaps from every attempt to turn them into a political bargaining chip thrown casually.2

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Over the weekend, peace talks in Islamabad between the United States and Iran collapsed, and President Trump announced a naval blockade of Iranian ports and coastal areas in the Strait of Hormuz. Traffic through the Strait had already plummeted from ~135 ships a day pre-war to just a handful of brave or connected souls. You probably know where this piece is going. Reverberations through global commodities etc. etc. but also! economic statecraft: OFAC licenses and potential new economic tools.

Crisis license

When a non-sanctioned supply of a commodity gets shut down, a gap opens that a sanctioned supply could fill. As has been well documented, the Strait of Hormuz previously moved 20% of the world’s oil supply. With the oil exports of Iran and Russia, two of the world’s largest suppliers, under sanctions, the U.S. Department of the Treasury has issued temporary reprieves via licenses on subsets of these sanctions to close the commodity gap and bring global oil prices back down. In the weeks since the start of the war, Treasury’s Office of Foreign Assets Control (OFAC) has issued some pretty surprising General Licenses to permit oil from Iran and Russia to flow into global markets:

• GL 133 (March 5): Permits Russian crude oil to India specifically, for vessels loaded on or before March 5 — a country-specific carve-out signaling sensitivity to allied nations feeling the energy shock. This license expired April 4th.

• GL 134 / 134A (March 12–19): Broadened GL 133 to all buyers — Russian crude oil already on the water gets a pass through April 11; explicitly covers blocked and sanctioned vessels

• Iran GL-U (March 20): Same logic as above applied to Iranian-origin crude oil and petroleum products loaded on or before March 20, expires April 19.

Separately, OFAC has also provided sanctions relief to Belarusian potash, which is a key ingredient in fertilizer. In December, OFAC issued GL 13 in response to the Belarusian government’s release of 123 political prisoners. A few months later in March, however, OFAC fully removed the major Belarusian potash producers from the sanctions (SDN) list. This delisting was likely in response to another prisoner release but also served to reduce pressure in the global fertilizer market. According to a new paper from the Kiel Institute, Qatar and Iran are among the world’s largest exporters of urea, the most widely used nitrogen fertilizer globally. While relief for potash cannot replace the flow of urea that has been disrupted by the closure of the Strait of Hormuz, easier access to Belarusian potash may still help reduce some of the pressure in the overall fertilizer market.

Smeltdown

Which commodities might we see sent into a tailspin next? We should definitely be talking about aluminum, also known as aluminium if you drink Earl Grey. Again, per the Kiel Institute, the Gulf supplies 23.5% of global aluminum alloys and 9.8% of unwrought aluminum, and that share has grown substantially over the past three decades as Gulf states invested heavily in energy-intensive smelting operations to take advantage of cheap local gas. Bahrain’s Alba and the UAE’s Emirates Global Aluminium rank among the world’s largest single-site aluminum smelters. The aluminum they produce goes into car body panels, aircraft fuselage sheets, electrical grid cables, and beer cans — an unglamorous industrial input that holds modern economies together.

And now the Gulf’s smelters are under attack. Last week, Emirates Global Aluminium (EGA), the Middle East’s top producer of aluminum, invoked force majeure clauses to suspend some deliveries after a facility was knocked offline by an Iranian drone attack. Bahrain’s Alba plant was struck by Iran in March, and even before the attacks, Alba had shut down three production lines (19% of its capacity) due to shipping disruptions in the Strait of Hormuz. Iran has justified the strikes by claiming that both Alba and EGA have ties to U.S. military firms.

An OFAC license could theoretically help here. In April 2024, Treasury banned the importation of Russian origin aluminum. Additionally, the London Metal Exchange and the Chicago Mercantile Exchange— the two largest global marketplaces where aluminum is bought and sold — are prohibited from accepting any Russian aluminum produced after April 2024, effectively locking it out of the world's major Western trading venues. However, even if a license were issued to permit Russian aluminum imports, there remains another barrier. Tariffs! In 2023, under President Biden, the United States imposed a 200% tariff on all aluminum and aluminum products from Russia — or any products containing even a small amount of aluminum smelted or cast in Russia. This 200% duty remains fully in place.

In early April, President Trump issued a new proclamation updating the broader aluminum tariff framework. A 50% tariff on all aluminum flowing into the U.S. had been in place since June 2025, but this new framework changed how the tax is calculated. Unless you are a tariff nerd and want to know the nitty-gritty (and it is both nitty and gritty), the tl;dr is that aluminum and goods made out of aluminum now face a tariff applied to their full customs value of either 50% or 25% depending on their levels of processing. Either way, it’s expensive.

Commerce to the rescue?

To reduce aluminum prices, President Trump could issue or further amend a presidential proclamation under Section 232 of the Trade Expansion Act of 1962. Section 232 gives the president authority to impose or adjust tariffs or quotas on imports if the Secretary of Commerce determines, after an investigation, that certain imports are entering the United States in such numbers or ways as to “threaten to impair” national security. And while the OFAC general licenses for Russian and Iranian crude oil were no small feat of interagency coordination, they still operated within an existing legal framework for pausing sanctions in exactly this kind of targeted, time-bounded relief. A Section 232 tariff modification has no such pausing mechanism. There is no “general license” equivalent for the Department of Commerce.

But maybe there should be! If the U.S. is using tariffs as the new sanctions, we need a release valve equivalent to OFAC’s general licenses to give the administration more flexibility in statecraft. Yes, even though the President continues to announce tariff actions over Truth Social, the Supreme Court’s recent decision actually limited the President’s ability to impose tariffs under the International Emergency Economic Powers Act and the legal framework for these is still evolving. To better refine the tool, one option would be a temporary tariff suspension authority tied explicitly to supply shocks, triggered when critical imports fall below a defined threshold, coordinated with key allies, and automatically expiring after a fixed period (unless renewed). That would preserve the strategic intent of tariffs while allowing the administration to stabilize markets in moments of acute disruption.

If the Trump administration does move to cut tariffs on foreign aluminum, who gets the waiver? Canada by far supplies the most aluminum to the United States, and is historically the dominant source of U.S. aluminum imports. Tariff relief, potentially in exchange for support of the U.S. blockade of Iran, could slot neatly into the ongoing trade agreement renegotiation. Any similar agreement with other aluminum exporters like India or Australia would be doable but still likely require bilateral negotiation.

Much more complicated would be tariff relief on aluminum from China and Russia. We have heavily taxed aluminum from our adversaries for geopolitical reasons: Chinese aluminum carries stacked Section 232 and Section 301 duties — the former on national security grounds, the latter as a penalty for unfair trade practices like IP theft — and Russian aluminum (which, don’t forget, is still mostly banned) carries that aforementioned 200% rate imposed as a response to the invasion of Ukraine and other national security concerns. So we’re much more likely to cut deals with our allies first.

All of which is to say that we should expect the unexpected. You never know when someone (even you!) might start a war, so if we’re going to start experimenting or freestyling tools of economic statecraft, à la tariffs as sanctions, we should design them such that we can give ourselves an out if the circumstances call for it. The circumstances, in this case, being missile attacks on aluminum smelters. What a time to be alive.1

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In Greek mythology, Charon’s obol was a coin placed in the mouth of the dead to bribe the ferryman, Charon, to give a soul safe passage across the River Styx. The obol was a silver coin worth one sixth of a drachma.

On Wednesday, Bloomberg reported that Iran is accepting tolls in Chinese renminbi — or stablecoins — to assure the safe passage of ships through the Strait of Hormuz:

For oil tankers, the starting price in the negotiations is typically around $1 per barrel of oil, paid in yuan, or stablecoins — cryptocurrencies pegged to the value of hard currency.

To paraphrase their reporting, Iran’s National Security Committee approved a bill to impose fees on ships passing through the Strait. Operators must contact an intermediary linked to Iran’s Revolutionary Guard Corps (IRGC) with detailed vessel information that is then screened for ties to Israel, the United States, or other states Iran considers hostile. Fee negotiations rely on a ranking from 1–5, with friendly countries getting better terms. This builds upon CNN’s reporting that Iran was considering only allowing tankers transporting oil traded in RMB to pass through the Strait.

Let me point out irony number one: per Bloomberg’s reporting, the fee is still assessed in dollars. I don’t think ships are paying 1 RMB per barrel of oil. Coverage is limited but it sounds like the dollar is still the unit of account. So, ships can’t pay in USD but the transaction will still be denominated in USD? Alright.

Anyway, given that a Very Large Crude Carrier holds roughly 2 million barrels, a single tanker could face fees starting at $2 million per transit. If these tolls (bribes) are being paid in RMB, that’s a lot of RMB. In an analysis of China’s cross-border RMB payment system, CIPS, Alisha Chhangani at the Atlantic Council writes:

GeoEconomics Center analysis of CIPS data shows in the chart below that monthly averages for daily transaction volume remained within a $85–105 billion (600–750 billion yuan) range over the past year. In mid-to-late March, however, daily observations rose to over $130 billion (around 940 billion yuan). On April 1, CIPS reported that the daily average transaction volume in March reached $134 billion, or 920.45 billion yuan.

That is a nearly 60% increase of cross-border RMB volume from the lower bound. Chhangani also notes that not all of this volume is from the (relatively new) tolling system, but the timing is interesting in the context of the war.

Stable passage

So, what about tolls slash bribes paid in stablecoins (98% of which are pegged to the U.S. dollar)? If the toll slash bribe system proves durable, my guess is that China and its closest trading partners will opt to pay in RMB. Countries without significant RMB payment infrastructure (i.e. anyone who is not a direct or indirect participant in CIPS) will probably pay in stablecoins.

So we should be watching for a few signals in stablecoin settlement volume:

• Aggregate stablecoin volume: According to Artemis, a blockchain analytics firm, stablecoin volume on March 30th hit $321 billion. This is well within the 30-day range, suggesting that the volume has not substantially picked up yet.

• Specific on-chain data: Increases in on-chain transactions in stablecoins on specific networks favored by Iran (like USDT on Tron) could suggest more durable usage. An academic paper from 2025 stated USDT on Tron accounted for approximately 72% of Iranian stablecoin activity.

• Large one-off transactions: The sudden appearance of individual large stablecoin transfers (over $1 million) that can be directly correlated to real-time transit of a vessel.

Irony number two is not just that the U.S. dollar are the unit of account in assessing the toll slash bribe, but also that it is a method of payment, via stablecoins — despite Iran previously vowing to fire upon ships carrying oil traded in dollars. Again, stablecoins are almost universally pegged to the U.S. dollar, so Iran is still accepting dollars, just dollars that don’t touch the U.S. banking system as an intermediary.

From a U.S. policy perspective, this is arguably a better outcome. Every ship that pays the IRGC’s toll slash bribe in stablecoins rather than RMB is continuing to transact in dollar-denominated assets and preserving dollar dominance in the global oil trade. Even if it’s not a trade we particularly want to support. The alternative, yuan-based payments, likely flow through CIPS and are not only opaque to the West but actively fuel China’s parallel financial system in ways that could outlast this conflict.

If Iran’s terror toll slash bribe system lasts, we should look to stablecoin volumes in the coming weeks as a proxy for dollar resilience. A world where bribes to pass physical chokepoints controlled by the United States’ enemies are priced and settled in USDT is a world where the dollar remains the unit of account for global commerce, even when the U.S. financial system is explicitly being cut out of the transaction.

For souls haggling with a psychopomp in the underworld, prospects weren’t so rosy. But in this world, life finds a way. Or, to coin a corollary, thanks to the ingenuity of the private sector through stablecoins, the dollar finds a way.1

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Despite a lot of hoopla about China’s nefarious master plan to dethrone the dollar, China still uses U.S. dollars. Lots of them.

The dollar is the world’s reserve currency and China, as the world’s second-largest economy, accumulates piles of dollars from trade and conducts a significant amount of its international commerce and finance in USD. So, perhaps reasonably, China wants to process dollars on its own terms. Over decades, China has assembled domestic and international options for dollar clearing and settlement — all of which have varying degrees of visibility to the American financial system.

This week we cover a quick snapshot of three rails, from most U.S.-connected to least, that allow China to process dollars. Note that we do not talk about China’s Cross-Border Payment System (CIPS) because it only processes RMB, not USD.

USD CHATS (Clearing House Automated Transfer System)

Let’s start with the most visible rail. USD CHATS is Hong Kong’s real-time gross settlement system (every payment settles individually and immediately) for U.S. dollar transactions. This system makes sure money actually moves when international banks (mostly licensed in Hong Kong) transact with each other in dollars. It was launched in 2000 to solve a practical problem: because Fedwire only operated during U.S. business hours, banks in Hong Kong settling transactions in dollars had to wait up to 12 hours for their transactions to settle in New York. This left them exposed to the risk that a counterparty could fail in that window (this is called Herstatt risk, after the 1974 collapse of a bank in Germany that had received Deutsche Marks but hadn’t yet delivered dollars in return, which wiped out a bunch of counterparties mid-settlement).

Banks participating in USD CHATS hold pre-funded dollar accounts at HSBC, and dollars are settled between banks locally and immediately during Asian business hours. The system handles not just interbank transfers but also stock market settlements, check clearing, and foreign exchange transactions across multiple currency pairs. Today it is one of the only large-value dollar payment systems in the world that operates outside the United States, with over 30 Chinese state-linked institutions now among its direct members and monthly transaction volumes exceeding $2 trillion. It is a major offshore valve for dollars.

The growth of USD CHATS reflects Hong Kong’s continuing role as China’s primary offshore dollar hub for trade payments, investment flows, hedging, and securities settlement — even as Beijing promotes the use of RMB elsewhere. In November 2023, Hong Kong Exchanges and Clearing launched a major tech upgrade that shortened the time between IPO pricing to trading from five days to two days and moved large volumes of IPO subscription money, refunds, and allotment payments from slow batch processing to direct real-time transfers through CHATS — causing the sharp jump in monthly transaction volumes in November 2023 and a permanently higher baseline afterward.

This rise in activity was likely driven by better tech. However, the broader policy context is worth noting. Just weeks earlier, at the October 2023 Central Finance Work Conference, Xi warned that “a small number of countries treat finance as tools for geopolitical games” and that financial sanctions “have presented new challenges to maintaining financial security.” Additionally, in December 2023, the United States expanded its secondary sanctions toolkit by issuing Executive Order 14114, which authorized penalties on foreign financial institutions facilitating transactions with Russia’s military-industrial base — a move widely seen as increasing pressure on third-country banks (including those in China) involved in sanctions evasion.

The timing of these events is likely coincidental, but they reflect a political environment in which Beijing has every incentive to deepen — not reduce — its capacity to process dollars outside American visibility. Talk about subtext!

Proprietary internal systems

Let’s take a beat to explain how the big four Chinese state-owned banks clear payments. For a long time, these banks cleared U.S. dollar transactions mainly through foreign correspondent banks. Eventually, these Chinese banks established U.S. branches as another option for dollar clearing. Bank of China went first in 1981 and then the rest followed starting in 2008. Establishing branches in the U.S. gave the Chinese banks a master account at the Federal Reserve and the ability to settle on Fedwire.

Given the global reach and sheer volume of transactions flowing through these banks, I wondered to what degree they tried to clear payments within the bank network using a book-to-book transfer (a payment that moves between two accounts at the same bank). I found that China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) have both built proprietary platforms to do exactly that. CCB developed its Global Multi-Currency Payment System (GMPS) which automatically routed each payment across two channels — book transfer or Fedwire. ICBC built a parallel system called FOVA, launched in 2006, which connects its domestic and overseas branches so they could process payments, remittances, and settlements on a single integrated platform. For GSIBs like ICBC and CCB, with their vast global branch networks and enormous transaction volumes, this internal book-to-book capability is a significant advantage. It allowed large volumes of USD payments to be settled entirely within the bank’s own ledger, often bypassing Fedwire and external correspondents altogether, which in fairness they still use.

An important note: There is no direct mention of GMPS or FOVA in either of these banks’ U.S. Resolution Plans (mandatory filings that every foreign bank with more than $50 billion in global assets must submit to the Federal Reserve). It’s possible these systems are no longer operational or have changed. But what we are trying to highlight here is China’s largest banks have publicly said they can and will process dollar payments book-to-book. I know that this is common for large banks with enormous pools of global liquidity. Many of those banks are our friends. It feels a lot different knowing that our greatest strategic adversary can use USD and avoid touching Fedwire or CHIPS entirely if it needs to.

CDFCPS

This last rail is more obscure. The China Domestic Foreign Currency Payment System (CDFCPS) is a real-time gross settlement system developed by the People’s Bank of China and launched in April 2008. This onshore system clears and settles foreign-denominated transactions tied to domestic trades of goods and services (for example, an international company pays a domestic Chinese supplier in dollars). It can process payments in eight currencies: USD, HKD, GBP, EUR, JPY, CAD, CHF, and AUD — but data (albeit dated) suggest that USD dominates by a wide margin. Very little information is available on this system and it appears, judging from China’s Payment System Reports, that the name was changed to China Foreign Exchange Payment System (CFXPS) in the early 2020s.

Onshore volumes have surged in recent years alongside China’s expanding foreign trade, profit repatriation, outbound investment, and growing activity in FX derivatives and securities settlement. In Q2 2025, for example, this system processed 1.7 million transactions worth RMB 10.12 trillion (a daily average of 27,600 transactions or RMB 165.837 billion), a big increase from earlier periods.

Dedollarization is complicated

The RMB’s share of China’s cross-border payments has risen, and use of CIPS (China’s cross-border RMB payment system) has grown. But China’s absolute volume of dollar clearing continues to expand through diversified routes: highly visible offshore clearing in Hong Kong, more controlled onshore clearing via CFXPS, and nearly invisible internal bank ledgers.

Several of these systems developed in response to constraints in U.S. payments infrastructure, including Fedwire’s restricted operating hours or the slow processing speed of correspondent banks. The U.S. has started tackling these constraints with real-time payment initiatives like FedNow and RTP or discussion of expanded Fedwire operating days. Implementing and adopting these initiatives will become a matter of national interest. Inefficiencies in our payment systems invite the rest of the world to build workarounds that may increase demand for dollars, but exist outside America’s visibility and control — China has done exactly that and, in a sense, domesticated the dollar.1

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Money Beyond Borders: Global Currencies from Croesus to Crypto
by Barry Eichengreen (Released today!)

A 2,500-year history of international currencies that reveals new insights about the future of the U.S. dollar—as well as crypto and central bank digital currencies

The risk of any historical accounting of international currencies is that it reads like the Book of Genesis:

And unto Athens was born the silver owl; and the owl begat the Alexander; and the Alexander begat the denarius; and the denarius begat the solidus; and the solidus begat the dinar; and the dinar begat the florin; and the florin begat the piece of eight; and the piece of eight begat the guilder; and the guilder begat the pound sterling; and the pound sterling begat the dollar.

And the dollar reigns supreme over the earth. Amen!

Money Beyond Borders avoids any such tedious recitations. Barry Eichengreen, a professor of economics at U.C. Berkeley and one of our nation’s foremost macroeconomists and economic historians on the dollar, writes with a strong narrative and humor sorely lacking in economic history. He generously provided Hegemoney with an advance copy of his new book for review.

Jess is an economist. I am not. As a rule I am suspicious of any book with “crypto” in the title. I have only served as a lowly government or tech staffer, but I read Bloomberg every morning and get a queasy feeling whenever I see a new headline about the death of the dollar, the currency in which I am paid my wages and buy bread. I know a bit but not enough about international currencies — which makes me the perfect audience for this book. Eichengreen has written a very good primer for economists and non-economists alike.

International, strong emphasis on the national

Much of Money Beyond Borders is about the tension in the international use of a national currency. A nation mints a currency to encourage domestic trade and pay the troops, but either vigorous traders or vigorous troops eventually lead that national currency to start playing a major role in international trade and financial services. The tension is between a world that wants a nation’s currency to be one thing, and a domestic audience who wants the currency to be another thing. Nations cannot be divorced from the international circulation of their currencies (despite John Maynard Keynes’ best efforts with the bancor).

There may be no better illustration of this than CNN’s recent reporting that Iran is considering letting container ships through the Strait of Hormuz provided the oil cargo is traded in Chinese yuan. In other words, Iran has a standing policy to blow up any vessel carrying oil traded in U.S. dollars. Almost all of the world’s oil is traded in U.S. dollars — now, neutral nations shipping oil traded in American currency for commercial convenience risk being fired upon by an IRGC missile fusillade. It is no wonder that shipwrecks bearing chests of once-invincible currencies now litter the ocean floor. Whether it makes any sense to Americans at the pump is a different matter.

Return of the strong states

Eichengreen by his own admission is no numismatist, but by studying the fall and rise of coins across history — the denarius (Rome), the solidus (Byzantium), or the piece of eight (the Spanish Empire) — we come to see how great international currencies “must be issued by strong states.”

A sort of recipe emerges. Strong states are those with the:

• Political structures to provide checks and balances (creditors represented in governing bodies, barriers to unilateral debasement)

• Administrative and regulatory capacity to mint and coin with high uniformity (quality assurance, regulated provision, liquidity)

• Military capability to defend their borders and institutions (geopolitical security, safe-haven effects)

Currencies were created both to encourage trade and commercial activity, but also to ensure the sovereignty of a nation. Among empires, an obvious function of currencies was to pay soldiers out on the frontiers (“soldiers” coming literally from those paid in Byzantium’s “solidus” coin, as Eichengreen notes) who also act as a distribution channel for spreading that currency in and beyond occupied territories.

The seeds of destruction

Alas! Per Eichengreen, “International currency status is not forever.” A consistent theme of his survey of ancient currencies is that “widespread international use of a national currency may itself be a factor in economic and geopolitical decline.” This is very interesting.

Eichengreen shows how an evolutionary pattern emerged in the late Middle Ages: a currency begins in trade, then adapts into trade finance, and finally specializes in pure financialization (trading financial instruments often without underlying physical goods or services). Florence and the Netherlands, for example, took a path of “starting out as a merchant, moving into merchant banking, and then becoming bankers pure and simple.”

Financialization appears to have domestic side effects including a decline of industry and the rise of speculation. An in-demand international currency is an over-valued currency, which makes exports less competitive and hollows out a country’s industrial capacity. Meanwhile, financial instruments become a more attractive investment than factories, so everyone piles into speculative financial products instead of building things. Perhaps this all sounds familiar? It is jarring to read how hard nations with international currencies tried to stave off speculation throughout history — given how fantastically speculative the American economy feels now (uh oh!).

And so a nation with an international currency becomes a global financial power ”at the expense of the industrial and commercial activities that are the fundamental sources of economic and military prowess.” Imperial overreach or war (victories and defeats can be equally as expensive) often finish a currency off. Eichengreen doesn’t dwell on the parallels to modern America: he is positive on the benefits of globalization and exorbitant privilege granted to America by the dollar, but his analysis on the downfall of currencies would fit neatly into a manifesto by a new torpedo company in El Segundo — America as a nation that has neglected its infrastructure, captured by rampant speculation, and rife with self-dealing by elites. A world where, as in London during the reign of the pound sterling, “the best minds were being drawn into finance rather than industry . . .”

Still on top

A third of Money Beyond Borders is dedicated to the rise of the dollar. The last third is dedicated to what comes next. Eichengreen is relatively measured: ticking through the top threats to the dollar, he finds them all coming up short, at least for now. China is a great commercial power, but doesn’t appear to want the exorbitant responsibility of a truly international currency so much as it resents America’s exorbitant privilege. Absent a commercial revolution elsewhere in the world combined with an implosion of the American economy, there are no worthy challengers. Still, our friends in Europe and enemies abroad beef up their monetary infrastructure and wait for a crisis (you will have to read the book for Eichengreen’s theories on a potential future of international currencies bifurcated between China and the U.S.).

It would have to be a mighty crisis. For now, acute chaos, even chaos that the United States stirs up, benefits us: ”Not for the last time, the dollar, its safe-haven status intact, benefited from macroeconomic volatility and geopolitical uncertainty, even volatility and uncertainty to which the United States itself contributed.” See also, the recent hard rally of the dollar post-Iran strikes.

A greater challenge, not explicitly addressed by Eichengreen, may be domestic support for an international dollar. The benefits of an international dollar are tangible (lower borrowing costs, insurance against financial shocks, leverage with sanctions) but could be relatively abstract to an Iowa primary voter. The costs hit closer to home (empty factories rusting! rampant speculation!). Bankers like an international dollar, but workers whose exports are being depressed understandably may not. During the rise of the dollar, America put up with a lot of unfair trade practices post-WWII as the cost of getting the rest of the world on their feet, dollars in hand. This has obviously been of benefit to the United States in the long run, but going forward an international dollar will need a better PR strategy — a stronger narrative for the well-established case for dollar dominance and why it requires us providing a global public good.

Pax dollara

“International currency status is not forever,” again, per Eichengreen.

Why not? The United States checks all the boxes for Eichengreen’s recipe of strong states and strong currencies: a strong military, a democratic republic with checks and balances, deep and liquid markets open to foreigners, price stability, an enormous and dynamic economy, broad international alliances, and a central bank that steps in to stabilize financial markets.

Eichengreen frames the rise and fall of currencies as inevitable, with the caveat that strong currencies sometimes outlive strong states. Francis Fukuyama famously saw Western liberal democracy as the ideological “end of history” — the “end-point of mankind’s ideological evolution” and the “final form of human government.” Perhaps the U.S. dollar can be an “end of international currency.” It would only require a stable and well-defended commercial republic that can resist the worst temptations of financial speculation and imperial overreach…

But Eichengreen doesn’t take his book this far afield. I’ll be curious to see what staffers in Washington or engineers in San Francisco take away from his book as lessons for actively securing the role of the dollar. At the very least, anyone in Silicon Valley hoping to build the future of currencies would benefit from Eichengreen’s study of the past.

Yes, the dollar has its wobbles. The standard concerns are addressed: fiscal insolvency, attacks on the Federal Reserve, and so on. But put in perspective against the rocky history of international currencies that lurch from strength to strength despite outright failures or defeats — they feel relatively minor. Eichengreen, for his part, advises prudence, coherence, a commitment to the rule of law and the separation of powers, and the honoring of commitments to foreign powers. A lot to hope for in human affairs.

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In 1974, Nixon’s Treasury Secretary William Simon took a transatlantic flight to Riyadh, over the course of which he (allegedly) drank so much whiskey that he rolled off the plane dead drunk — and sealed a deal with the Saudi King Faisal: the United States would buy oil from Saudi Arabia and provide the Kingdom with military aid, and in return, the Saudis would plow billions of dollars from their oil revenues back into U.S. Treasuries. And so the petrodollar was born: a U.S. dollar earned through crude oil exports and recycled into dollar-based assets.

Over the past few years, many commentators have declared the death of the petrodollar. The petrodollar is not dead. Its role is different, but it gave us something great.

Petrodollars are no longer the largest driver of the offshore market

For decades, petrodollars were the backbone of the offshore dollar market (basically, dollars in banks outside the U.S.). Gulf states earned dollars from oil sales and deposited those dollars at European banks. The European banks then recycled those dollars as loans to other countries, often emerging markets. IMF research showed that in the 1970s, 44% of earnings from oil sales showed up as deposits in banks, mostly in Europe — and also that the foreign debts of 100 oil-importing developing countries were estimated to have increased by 150% between 1973 and 1977, likely a direct result of petrodollar deposits. In the 1970s, the offshore dollar market and the petrodollar recycling machine were essentially one and the same.

However, petrodollars are less important for creating dollar assets than they used to be. Another IMF study documented that the share of oil revenues converted into deposits at banks fell from 44% to approximately 27% in the early 2000s. I wasn’t able to find more recent figures, so I updated this analysis using Bank of International Settlements (BIS) Locational Banking Statistics data on USD-denominated deposit liabilities at participating banks for 18 oil-exporting countries, divided by annual current account surpluses from the IMF World Economic Outlook database, and frankly the results surprised me.1

Our methodology for the early 2000s (2001–2006) spat out a figure of approximately 21% of oil revenues held as dollar deposits at foreign banks — reasonably consistent with the IMF’s 27% share, given a slightly differing approach. But in the next period, 2007–2013, that share had fallen to approximately 13%. In the most recent period with available data, 2018–2023, it has collapsed to about 6%. Given the data limitations, the estimates likely represent a lower bound rather than the true level of bank intermediation. The directional trend which shows a steady falling share is, however, what matters.

Just to pull out one illustrative year, in 2022, oil exporters collectively earned a current account surplus (more earnings from exports than imports) of $901 billion. From that $901 billion, deposits at BIS reporting banks from oil-exporters only increased by a net of $24 billion. That is a bank intermediation share of 2.7%. So, based on our methodology, oil exporters are no longer putting their petrodollars in banks.

And yet, the offshore dollar credit market continued to grow. More BIS data shows that the offshore dollar credit market stood at $2.5 trillion in 2000. By Q3 of 2025, it had reached $14.2 trillion, a six-fold increase. This growth was steady, interrupted only briefly by the 2008 financial crisis and the 2022–2023 Federal Reserve tightening cycle.

This tells us that the dollar is very structurally resilient. Petrodollars seeded the offshore dollar market; they were the original source of dollar liquidity outside the United States. But the offshore dollar market has since developed its own momentum, driven by corporate dollar bond issuance, dollar-denominated trade finance, and the borrowing needs of emerging market governments and multinational corporations. The offshore dollar market no longer needs the petrodollar to grow.

Petrodollars are also significantly less important to U.S. Treasuries

Petrodollars were designed to create a structural demand for the dollar and U.S. Treasuries. And that they did. In the mid-1970s, the Arab Gulf monarchies became the largest single source of new credit for the United States. From 1974 to 1976, OPEC foreign investments totaled roughly $125 billion, a quarter of which flowed directly into U.S. banks or Treasuries.

Less so today. Oil exporters are still large purchasers of Treasuries but nowhere near as significant for demand as they were in the 1970s. Saudi Arabia, the UAE, Kuwait, and Oman — combined — held $149 billion of U.S. Treasuries in 2012. By 2025, they held $311 billion. While that sounds like a lot, their new purchases only covered 2% of deficit spending in 2025, versus roughly 10% of deficit spending (of just Saudi holdings!) during the first few years of the Reagan administration. Granted, our deficit spending was much smaller back then.

There are more petrodollars than ever, they’re just going elsewhere. In the 1970s, oil revenue flowed into Western banks and U.S. Treasuries practically by default — there were so few alternatives. Today, Gulf states have built some of the largest sovereign wealth funds that deploy capital in ways that would be completely alien to Richard Nixon. Saudi Arabia’s Public Investment Fund manages nearly $1 trillion in assets, with 80% of that portfolio directed at domestic investments and megaprojects. Abu Dhabi’s and Kuwait’s sovereign wealth funds are now ranked among the top ten shareholders in Chinese A-share listed firms, and Gulf sovereign wealth funds invested $9.5 billion into China over the course of 2024.

The petrodollar still exists, but rather than being recycled through London banks into loans for emerging markets like Brazil, it is being deployed into Saudi domestic projects, Indian tech startups, Chinese equity markets, and, most importantly, Premier League football clubs.

But petrodollars still dominate commodity pricing

Petrodollars aren’t what they used to be, but the dollar remains dominant in global commodity markets and that’s really all that matters. Oil pricing dominance has led to commodity pricing dominance and every commodity benchmark, from Brent crude to copper to soybeans, is still quoted in dollars. This pricing convention forces commodity importers to hold and trade in dollars, creating a structural demand for USD independent of whether or not Saudi Arabia buys Treasuries. The petrodollar system is now a pricing mechanism — it matters less where the money goes after an oil sale and more that the sale itself happens in dollars.

China, unsurprisingly, doesn’t love this state of affairs, though their efforts to combat it are marginal in scale (for now). In 2023, China used the digital yuan to purchase one million barrels of oil at the Shanghai Petroleum and Natural Gas Exchange — a token transaction, but the first cross-border oil settlement in eCNY. That same year, the People’s Bank of China and the Saudi Central Bank signed their first bilateral currency swap agreement, covering up to RMB 50 billion for three years, and Bank of China opened its first branch in Riyadh to facilitate renminbi settlement. Then in 2024, Saudi Arabia joined mBridge — a multi-central bank digital currency platform developed with China, the UAE, Hong Kong, and Thailand to enable cross-border settlements outside the SWIFT network.

Russia, meanwhile, has been redirecting substantial oil exports into yuan and rupee settlement. These are all real situations worth monitoring, but in context: around 80% of global oil trade still happens in dollars, and S&P Global forecasts that yuan-based oil trade will take decades to scale meaningfully. Oil exporters are only willing to accept yuan for crude oil if they can spend it, and the renminbi isn’t broadly used in international trade and finance, leaving few places for those RMB proceeds to go.

William Simon passed away in 2000. I hope he is drinking brown liquor in the afterlife. His handshake deal with the Saudis is also dead. What we’re left with is both less tangible and more stubborn — a convention that prices almost all commodities in dollars, embedded in every futures contract, trade invoice, and hedging desk on the planet. The dollar lives. And for that I raise a glass to Secretary Simon.2

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Within 72 hours of the first strikes on Iran, six U.S. service members were dead, Dubai International Airport was closed, oil had spiked higher, the Middle East was in open regional war — and the dollar was up over 1.5%.

The obvious explanation here is that the dollar is the world’s ultimate safe haven asset, and USD rises when geopolitical risk spikes.

However, this hasn’t been the case historically.

History shows short-term weakness or a muted reaction after strikes

After the dollar surged on Monday, I wanted to see if this was a consistent pattern following kinetic U.S. engagement, so I looked at the behavior of the dollar index (DXY) immediately after U.S.-initiated strikes going back to 1991 — 19 events in total, from Desert Storm to the Syria strikes to the Soleimani assassination (see footnote for an explanation of the methodology for selecting these strikes)1. The pattern is counter-intuitive for a safe-haven asset. Instead of roaring higher in a universal risk-off trade, in the immediate days (1–3 days) after the strike the dollar was either down or relatively flat (moving less than 0.5%). On average, the dollar index moved -0.23% on the first trading day following the attack, and -0.15% a week after the first strike.

The data suggests that historically the dollar does not see a surge in safe-haven demand in the immediate aftermath of a U.S.-initiated strike.

Why does the dollar typically fall right after a strike?

The short-run mechanism isn’t complicated once you unpack it. U.S.-initiated military action in the Middle East can easily become an inflationary event. Oil prices rise on supply disruption fears (less oil = more expensive oil) and shipping costs spike (very costly and long detour to avoid the Strait of Hormuz). The cost of shipping oil from the Middle East to China just hit an all-time high, increasing almost 100% by Monday as some insurance companies canceled war risk coverage. That makes energy more expensive. Higher oil prices act like a tax on households and businesses, weighing on growth, stoking inflation, and putting the Fed in a difficult position as they balance controlling higher prices against cushioning growth. That combination has historically put downward pressure on the dollar, even when American oil companies are benefiting. Markets are forward-looking, so just the anticipation of this disruption and subsequent inflationary pressure can create more dollar sellers.

The market may also start to price in a longer-term conflict. The academic literature is clear about what happens to currencies over the arc of a war. To fight wars, governments spend money. That spending gets financed through debt. Although previously the US had raised taxes and cut spending to pay for wars, the post 9/11 playbook moved us into the era of debt-financed conflict. More debt means more issuance of U.S. Treasuries, which means more dollars in circulation — another structurally inflationary factor. A study by Christopher Warburton found that the dollar depreciated at an average monthly rate of 1.2% during the Iraq War.

Are the Iran strikes different?

And yet, this week we saw oil and the USD surging higher together. A few thoughts on why this time could be different:

The short squeeze. Before the first bomb dropped, the dollar was already down 9% over the past year. According to Bank of America’s fund manager survey, shorts against the dollar reached their highest level since 2012. When that many people are leaning the same way, it only takes one unexpected catalyst to trigger a cascade of forced covering. The death of Khamenei could have fueled a panic closing of crowded shorts that contributed to the stronger dollar.

Market dysfunction. Okay, hear me out. This is the first time the Strait of Hormuz, which transports one-fifth of the world’s oil, has effectively closed and this has likely jammed the plumbing of the financing of the global oil trade. Trading firms with derivative positions suddenly need dollars to cover margin calls on positions moving sharply. At the same time, letters of credit used to finance the frozen shipments tie up dollars on banks’ balance sheets, effectively locking them until the trade can be resolved. Buyers also need replacement oil, which requires new letters of credit and additional dollar commitments. Multiply that across a lot of tankers and you get a sudden scramble for dollars.

Macroeconomics. The macro backdrop today is the opposite of almost every previous strike episode in the dataset. During the majority of these military campaigns, the Federal Reserve was actively cutting rates or sitting near cycle lows. This time, the Fed has paused its monetary easing and some officials are considering if it is time to resume tightening. One of the few times that saw dollar strength following a strike was after Operation Poseidon Archer (2024–2025) and this coincided with the Fed Funds Rate at its cycle peak. The implication is that when rates are expected to be higher in the U.S. (i.e. tightening cycles) compared to similar securities, money will chase the higher yield regardless of what is happening with the military.

Structural geopolitical bid. Academic research argues that international reserve currency choice is driven not only by economic factors like market size, capital markets, and credibility, but also by geopolitical ones. Barry Eichengreen has noted that military alliances can boost a currency’s share in a partner’s foreign reserves by roughly 30 percentage points. As we face the potential of prolonged conflict, one could argue that dollar asset demand from our allies is lending support to the USD.

The scale of potential change. History doesn’t help us here. Iran has been the central organizing adversary in Middle Eastern geopolitics since 1979 —shipping weapons to the Houthis, supporting proxy militias in Iraq, arming Hezbollah in Lebanon, and funding Hamas in Gaza. For nearly half a century, every risk premium embedded in oil markets and every concern over nuclear proliferation bore the fingerprints of the Islamic Republic. Markets may be looking past the immediate chaos and asking genuinely new questions: what does the world look like without this Iranian regime and what will the next iteration look like? Those questions are balanced against an older and weightier fear: could this be the start of a worldwide conflict?

History strikes back

I’ve focused only on immediate price action — the first 72 hours of a conflict with Iran that could last months or years. The rise in the dollar is supported by technical, structural, and macro factors, and those may be enough for continued support. If the dollar falls over the next few weeks, it doesn’t mean it is no longer a safe haven. Maybe the conflict is subsiding or maybe history is just reasserting itself.2

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“The boycott is an infinitely more terrible instrument of war. Excepting our own singularly fortunate country, I can not think of any other country that can live upon its own resources.” — Woodrow Wilson (1919)

Here’s a short primer on how to use economic statecraft: When you want another country to do something, you take a look at your economy and identify a few goods or services that the target country depends upon — ideally something they really depend upon — then you turn that dependence into a weapon: withholding access, taxing it, etc., until the country shapes up and does what you want. This lets you leverage commerce for political means. Economic statecraft is both effective (every country needs grain!) and tempting (no need to send in the army!), so much so that any one tool is rarely viable for long, as target countries find workarounds. And what then?

For a moment, it seemed like tariffs might become the new sanctions, but the Supreme Court struck down the Trump administration’s tariffs issued through IEEPA, ruling that they lacked legal authority. IEEPA tariffs are now off the table. In response, President Trump announced a new, universal 15% (or maybe 10%?) tariff, using Section 122 of the Trade Act of 1974, which is legally stronger but strategically weaker (can’t target specific countries, capped at 15%, and expires in 150 days). That 150-day clock is running, and though the White House has backup options, there’s no clear path to rebuild the full tariff regime by July. At the meta level, our trading partners are recalculating whether U.S. tariff threats are still credible: the deals we struck with China and Canada are in limbo, and the European Union has already paused ratification of its trade deal.

As the door closes on IEEPA, the administration will look for a window. This is nothing new. Since antiquity, states have turned to economic coercion to achieve foreign policy aims, and when one tool stopped working, they invented another. Innovation and statecraft have always gone hand-in-hand, so, in a bit of a departure from our regular Hegemoney content, I rounded up a brief and incomplete list of examples of statecraft innovation through history — with many thanks to my brother, a history professor, who taught me about the Salt War.

Disciplining rogue Hellenic states

One of the earliest recorded uses of economic statecraft dates to the fifth century BCE, when Athens issued the Megarian Decree. The decree banned the citizens of the city-state of Megara from Athens’ markets and trade within the Athenian maritime empire — a move likely driven by political tension and commercial rivalry.1 Historians remember the decree less for its effectiveness and more for its consequences: many consider it a trigger for the Peloponnesian War.2 Still, it marked a critical innovation: the use of economic ties to achieve political aims and a recognition that blocking access to markets could be as devastating as a Hellenic phalanx.

Feeding (or starving) Rome’s hungry legions

Over the centuries that followed, rulers repeatedly turned to economic weapons. In the late Roman Republic, the empire’s reliance on grain was a sign of its strength as much as it was a vulnerability. An expansionist power like Rome required grain to both feed a growing civilian population and sustain military forces across the Mediterranean and Europe. During the Third Servile War (73-71 BCE), Spartacus led his army to the Strait of Messina, intent on crossing over to Sicily to escape the mainland and incite another slave revolt. While his revolt failed, some historians argue that Spartacus would have assessed that Sicily’s role as the breadbasket of Rome made it an appetizing target (sorry) and invaluable negotiating chip.

Centuries later, Cleopatra VII, the last Queen of Ptolemaic Egypt, understood the political leverage of Egypt’s agricultural wealth. Rome’s reliance on grain supplies from Egypt gave Cleopatra leverage over Rome, and it’s possible she used this leverage to gain preferential treatment from Rome and its emissaries, imitating earlier tactics of the Ptolemies and Greek city-states in the wake of the wars of the Diadochi. When Octavian conquered Egypt and absorbed it into the Roman Empire, he forbade Roman elites to enter Egypt without his permission — preventing rivals from exploiting Egypt’s agricultural abundance. Grain was finally weaponized against Rome during the Gildonic War of 398 CE.3 The Roman governor of North Africa, Gildo, sought to form a separate state from Rome by cutting off the empire’s access to grain. He did not succeed; according to Gibbon, the Roman legions defeated Gildo’s army in a nearly bloodless battle, and he was thrown into a dungeon by his former subjects while trying to flee. But he deserves some credit for understanding that commodity dependence can be used as leverage.

Silken espionage

The first known act of industrial espionage occurred under the Byzantine Empire, the dominant economic player in the 6th century Silk Road trade. Constantinople was Europe’s primary gateway for Asian luxury goods. However, the lucrative overland route ran through Persian-controlled lands, allowing the Persian Sassanid Empire to enrich itself through tariffs and transit tolls. Determined to break this monopoly, Byzantine Emperor Justinian I sought the secrets of Chinese silk from the Far East to create a local silk industry in the Roman East. Justinian sent two Nestorian Christian monks into China under the guise of missionary work, and they successfully smuggled out silkworm eggs in hollowed-out bamboo canes. The Byzantine Empire soon established its own silk industry — cutting out both Chinese and Persian middlemen. This was a striking innovation in economic statecraft: the fusion of intelligence, trade, and industrial policy to reshape the flows of commerce and power.

Spiritual warfare

By the late Middle Ages, the papacy had become adept at using spiritual networks for political and economic coercion. An “interdict” — a suspension of religious services — functioned as both moral punishment and economic warfare, depriving entire regions of sacraments and trade. In 1376, during the War of the Eight Saints, Pope Gregory XI placed all of Florence under interdict.45 Going beyond earlier spiritual sanctions, Gregory not only excommunicated the city’s leaders and suspended all ecclesiastical rites within Florentine territory, but also authorized the confiscation of Florentine property and the arrest of Florentines throughout papal lands. The sanction was unevenly enforced across the papal states and didn’t paralyze commercial activity, but it struck at the foundations of Florentine prosperity6, marginalizing the diaspora and hindering trade with the city. Gregory’s act represented an early fusion of religious authority with economic interdiction. Use what you got.

When faith failed to bend rivals to papal will, fiscal innovation and military engineering were often effective. Enter the Salt War of the 1540s: The Papal States instituted a salt tax on all territory within its sphere of control. The Italian city of Perugia, while nominally under Papal control, possessed near complete autonomy and rejected the tax outright. Pope Paul III responded by officially annexing Perugia and constructing the Rocca Paolina, one of Italy’s most imposing Renaissance military fortifications and a clear symbol that Perugia’s semi-independence was at an end. The Rocca served not merely as a military stronghold but as a monument to economic subjugation — a physical reminder that fiscal sovereignty flowed from obedience to Rome. Through taxation, confiscation, and a big fortress, the papacy showed how control over material infrastructure can secure political submission.

Total economic war

After the destruction of the French fleet at the Battle of Trafalgar by the Royal Navy, Napoleon recognized that British naval supremacy made an invasion of Britain impossible. So he turned to economic warfare, seeking to strangle the British economy through a continental-scale embargo. The Berlin Decree of 18067 established the Continental System, prohibiting all correspondence and trade with Britain and mandating the seizure of British goods in French or allied territories — designed to seal off the British Colonial Empire from European markets. Napoleon’s Milan Decree of 1807 extended the system, stating that any neutral ship that submitted to British search or paid British duties would be treated as British and subject to seizure.

Conceived as a total embargo, the Continental System quickly evolved into a sprawling, protectionist regime of tariffs, licenses, and customs controls that sought to starve Britain’s economy while financing France’s empire through tightly managed, “licensed,” and highly corrupt commerce. The experiment fused economic isolation with industrial policy, and forced continental Europe to develop domestic industries and administrative controls that foreshadowed modern wartime economies. In Napoleon’s hands, the embargo grew beyond a mere tool of deprivation into an early form of economic system-building — a precursor to the total mobilization of markets that would define the twentieth century8.

The First World War then birthed economic warfare on a multilateral scale, as Allied Europe pioneered a “financial blockade” that blacklisted enemy firms, restricted loans, seized German assets, and coordinated control over shipping, insurance, and trade9. Capital markets and financial networks were mobilized as instruments of war. This period also gave rise to the idea that economic pressure could replace direct violence. British statesman Robert Cecil argued in 1916 that there should be a tool that “put considerable pressure on a recalcitrant power without causing excessive risk to the power using it.”10 The League of Nations first formalized financial blockades as a collective instrument in the 1920s and 1930s, hardening an experiment with economic coercion into a permanent feature of international politics — even though early efforts against Italy proved uneven and ultimately ineffective.11

Arming the dollar

After 1945, Bretton Woods institutionalized U.S. financial leadership by tying global currencies to the dollar and the dollar to gold, while placing IMF and World Bank governance in American hands. The Bretton Woods system was designed to provide stability. But by concentrating clearing, credit, and reserves in New York, it created a coercive tool that later enabled finance to be used as a weapon — completing a long evolution from ancient embargoes to modern sanctions.1213

Over time, the dollar’s centrality in global finance turned access to USD into a lever. The Office of Foreign Assets Control (OFAC), born from its WWII predecessor “The Office of Foreign Funds Control,” in the mid-twentieth century institutionalized this power, with financial exclusion becoming a legal instrument of statecraft. What began as a tool to freeze Axis assets in World War II evolved into our precise system of modern sanctions.

The campaign against Colombian narcotraffickers in the 1990s demonstrated how cutting individuals and banks off from dollar clearing could cripple criminal networks. After September 11, this machinery got turbocharged. The U.S. Department of the Treasury redefined national security to include the financial system itself — targeting terrorists, proliferators, and their enablers through an expanding network of designations. As Juan Zarate observed in Treasury’s War, the attacks remade the department into “the nerve center for a different kind of warfare.”14

Access to the dollar system became a privilege, not a right. The U.S. harnessed SWIFT data to trace terrorist financing and later pressured the network to disconnect Iranian banks. By 2022, the coordinated sanctions campaign against Russia — freezing hundreds of billions in reserves, cutting major banks from SWIFT, and enforcing oil-price caps — showed how control over financial plumbing could rival traditional warfare in speed, scope, and consequence.

What is old is new again

A century ago, Woodrow Wilson warned that the economic blockade was “an infinitely more terrible instrument of war.” To stay terrible and effective, economic statecraft will have to evolve. Persia monopolized the silk route, so Justinian sent monks into China. Britain ruled the seas, so Napoleon shut every European port to British goods. Terrorists exploited global finance, so Treasury turned the dollar system into a weapon. The Trump administration, disarmed of its favorite tool, is searching for the next one. They will find it — in old laws or new technologies. As Edward Fishman observes in Chokepoints15 and elsewhere, when certain chokepoints lose potency, others emerge, and economic warfare will only continue to grow. Innovation is the central theme of the history of economic statecraft. The future will test how that ingenuity is applied.16

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The United States is in a bind. China, our main geopolitical rival, controls rare-earth refining and processing and is actively pushing to ensure rare-earth metals are priced and settled in Chinese renminbi. What’s a superpower to do? What America does best: financialization.

Last week, Reuters reported that the world’s largest derivatives exchange, Chicago-based CME Group, is developing plans to launch the first-ever futures contract for rare-earth elements — specifically a contract for neodymium and praseodymium oxide (NdPr), the primary rare earths used in permanent magnets for electric vehicles, wind turbines, and drones. Assuming you’d like to be competitive in the future of manufacturing, warfare, or energy, these are essential inputs.

If launched, the CME contract could become a widely-recognized, dollar-based (we love this), standardized price that:

1. Creates a reliable reference for pricing decisions and contract negotiations

2. Lets market participants financially hedge against extreme price swings caused by Chinese dominance in rare earths

3. Helps the U.S. take some pricing power from China, if paired with the right policies

What is a futures contract? A standardized, exchange-traded contract to buy or sell an underlying asset (e.g. oil, gold, or metals) at a fixed price on a future date. They are traded on exchanges like the Chicago Mercantile Exchange or London Metals Exchange (LME).

Why do we need them? The OG reason is that producers, consumers, and businesses use futures to lock in prices and protect against adverse price swings. Southwest Airlines saved about $3.5 billion on jet fuel costs over a decade because they loaded up on crude oil futures in 1998 at ~$11 per barrel (simpler times). Futures markets get producers, consumers, and speculators on the same platform to gauge future supply and demand expectations. They were the original prediction market except you’re betting on wheat prices instead of whether, I don’t know, Jesus will return in 2027.

How do they enforce USD dominance? Most major global commodity futures are priced and settled in USD, which means participants around the world must acquire dollars to trade, post margin, or settle contracts. This creates persistent, structural demand for USD, reinforcing the dollar’s central role in global commerce.

A rare-earth hegemon

China controls refining (70%) and processing (90%) of rare earths, which allows them to largely dictate pricing in this small, thinly-traded, and opaque market. Unlike widely-traded metals like gold, prices for rare earths have been set through negotiations between Chinese producers and global buyers (Raytheon, GM, companies that need rare earths to make things), and influenced by Chinese government export and production quotas.

In 2014, China established the Baotou Rare Earth Products Exchange. Baotou is a city the size of Chicago in Inner Mongolia, surrounded by 80% of China’s rare-earth reserves. By centralizing trading on the exchange, China made prices for companies across the rare-earth supply chain more transparent, though foreign participants typically have to access the market through intermediaries. All trades are spot trades (i.e. purchases for immediate delivery… if you hit “buy” you better have somewhere to put all that neodymium you are about to get delivered) and trades are settled in Chinese renminbi (RMB).

The exchange also just launched a rare-earth price index to give participants a benchmark to track daily prices. As China tries to direct more transactions through the exchange, global buyers are forced to settle in RMB (and therefore manage both price swings and currency exposure), positioning the renminbi as the primary, if not sole, currency for global rare-earth transactions — a stated ambition of the Baotou exchange chairman.

Futures contracts are not allowed on the Baotou exchange. This is ostensibly to limit speculation by retail traders, which is something of a pastime in China: Bloomberg recently reported on Merry Chen, a 42-year old homemaker in Hangzhou who “with no prior experience in derivatives . . . opened a futures account last Monday on the advice of friends” and blew 750,000 yuan trading gold futures.

But the futures ban could also have a strategic purpose: without a way to hedge against price volatility, rare-earth projects in the West struggle to secure financing from banks. The CFO of MP Materials recently complained:

“What good is it to invest billions of dollars if the second you turn your refinery on, prices go from US$170 to US$45?”

Banks require predictable cash flows to underwrite projects, but volatility in rare-earth prices with no way to hedge makes financial projections highly speculative. Perhaps for this very reason, Chinese exchanges have signaled an intent but announced no concrete timelines to offer rare-earth futures. This financing gap in the West could explain why major rare-earth projects frequently rely on backing from the U.S. government. Only Uncle Sam has the risk tolerance for the geopolitical premium that comes with China controlling pricing in rare earths.

So what can the U.S. do to take back some control of pricing in rare earths? In the 2010s, China actually faced a similar problem in the iron ore market, including a few dominant suppliers, many fragmented buyers, opaque pricing, and limited hedging tools. They attempted to solve their situation with futures.

Lessons from China’s iron ore futures

The largest buyer of a commodity doesn’t automatically get to call the shots on prices of that commodity. China learned this the hard way with iron ore (which is used to make steel for bridges, railroads, factories, etc.). In 2013, China imported over 70% of shipped iron ore, an incredibly dominant market share that translated into zero price-setting power because Chinese demand came from 7,300+ fragmented steel mills, while supply came from three coordinated mining giants (BHP, Rio Tinto, Vale).

Before 2010, these three mining companies would get in a room every year to negotiate regional prices with Japanese, Korean, and Chinese steelmakers, though the Japanese had the most influence. In 2010, the miners abandoned the annual negotiations, which had locked in prices for a year, because explosive demand from China kept pushing ore prices in spot markets higher (leaving billions on the table for miners). The miners instead tied their contracts to dollar-denominated spot market price indices like Platts.

China, by now the largest importer, still bemoaned their lack of pricing power. To rectify the situation, the Dalian Commodity Exchange (based in Dalian, a port city the size of Houston) launched an iron ore futures contract in 2013, which importantly included physical delivery and settlement in RMB. The other widely-traded iron ore contracts in Singapore and Chicago were cash-settled (did not include physical delivery) and priced in USD.

Physical delivery means that when the futures contract expires, you don’t just get or owe cash. You get the actual commodity. The physical thing. In this case: actual iron ore, showing up at an actual warehouse, requiring actual trucks to move it. I will never forget being a newly minted derivatives trader on the floor of the Chicago Board of Trade. At 6:30 AM and out of nowhere I heard a string of the most colorful expletives I’d ever heard in my life. The trader a few desks down had forgotten to close out his crude oil futures before the contract expired, and the clearing house was calling him to ask where he would like his 50,000 barrels of oil delivered. He had to scramble to find some warehouse in Louisiana willing to take delivery so he could sell the crude to someone who actually wanted it. Awkward.

Anyway! Physical delivery had some useful properties for China. First, it gave Chinese steel mills guaranteed access to physical iron ore at locked-in prices, protecting them from both price volatility and the more troublesome problem of not being able to buy iron ore when supply gets tight. Cash-settled futures hedge your financial exposure but don’t give you anything to throw in the blast furnace. Second, physical delivery created an independent Chinese price benchmark based on real transactions. Actual iron ore changing hands at actual Chinese ports drove Chinese prices, instead of Western price assessments, which industry observers believed were more favorable to (and preferred by) the mining giants.

The Dalian Commodity Exchange’s iron ore futures became the world’s largest iron ore derivatives market by volume. In 2018, China opened the contract to foreign traders, which boosted liquidity. By 2019, major international trading companies like Cargill and even Vale started using Dalian iron ore futures prices as the basis for some spot contracts with Chinese buyers, even settling transactions in RMB. Academic research showed the futures market was useful: it contributed 60–70% of price discovery, meaning futures prices were doing most of the work to figure out what iron ore should cost. Chinese importers now had a RMB-based tool to hedge and lock in prices.

Futures can only take you so far

The Dalian iron ore futures contract gave Chinese steel mills some useful things: renminbi hedging, huge trading volumes, and regional price influence. But it failed to give China truly global pricing power in iron ore for a couple reasons:

• Despite China’s status as top importer, the market was still a fragmented group of steel producers reliant on supply from the mining giants who preferred the dollar-denominated benchmarks, like Platts, that they adopted in 2010.

• While physical delivery was great for Chinese buyers, the Dalian futures required delivery at a Chinese port and that is not so convenient if you are literally anywhere else.

• The Dalian Commodity Exchange became wildly popular with Chinese retail speculators, creating volatility unrelated to actual iron ore fundamentals, which made foreign participants nervous about using it for serious pricing.

So while futures gave China a foundation to improve conditions for steelmakers, they weren’t enough. Beyond diversifying iron ore supply (spoiler alert: China just started importing ore from Guinea), China needed to unite its 7,000 steel producers. That moment came in 2022, when China formed the China Mineral Resources Group, consolidating more than half the Chinese steelmakers into a unified negotiating bloc — which is working. Last year, the Australian mining giant BHP agreed to settle 30% of its spot trades with China in RMB. And in December, China Mineral Resources Group forced Rio Tinto and Fortescue to abandon the dollar-based Platts index in contract negotiations. Rio switched to Fastmarkets (still dollar-based but less dominant), while Fortescue adopted an average including China’s RMB-denominated Mysteel index.

Major miners adopting China-based indices will probably only increase liquidity on the Dalian futures market and strengthen China’s hand in future negotiations — risking a self-reinforcing cycle where pricing power gradually migrates from West to East.

A mirror image for rare earths

The West now faces a similar challenge with rare earths, only in reverse: China is the major producer, and the West is the dominant consumer facing Beijing’s pricing power. A Chicago rare-earth futures contract would play the same role the Dalian iron ore futures played for China, creating a USD benchmark and hedging instrument.

But rare-earth futures face an uphill climb. The market is smaller, more fragmented (17 elements vs. 1 commodity), and more politically controlled than iron ore ever was. Even the contract design is harder than it sounds. The CME will need to pick a reference spec for NdPr and build independent verification infrastructure around it, neither of which is trivial. If initial participation is low, traders could be discouraged, depriving an illiquid market of the depth needed for reliable price discovery, hedging, and financing. The Dalian futures market also became wildly popular with Chinese retail speculators, creating volatility unrelated to fundamentals. Though it’s less likely, the same could happen with rare earths in the West if neodymium-praseodymium oxide becomes the new .

However, the strategic importance of rare earths is so obvious that we have to at least try. As Heidi Crebo-Rediker of CFR puts it:

“China’s global dominance of critical minerals supply and demand, paired with lack of commodity price sensitivity, gives Beijing control of global pricing power. China has weaponized this pricing power for the past two decades to put market-based mining companies out of business around the world.” (emphasis mine)

China’s iron ore futures alone couldn’t deliver pricing power in 2013, or 2015, or even 2020, until the China Mineral Resources Group coordinated buying power. And with these complementary changes, the Dalian iron ore futures became China’s first successful potential challenge to dollar dominance in commodity pricing.

The U.S. is quickly getting up to speed to mirror China’s strategy. The U.S. government’s Project Vault committed $10 billion in Export-Import Bank financing to create a strategic critical minerals stockpile. The Department of War has taken equity stakes in MP Materials, and established price floors for neodymium-praseodymium oxide (NdPr). And the U.S. is accelerating supply diversification with $1.6 billion in federal funding for USA Rare Earth, $600 million for Tronox’s Australian processing facility, and partnerships from Brazil to Australia.

A Chicago futures contract won’t immediately get the U.S. out of its rare-earth bind. But a decade from now, with liquid markets, government support, and engineering breakthroughs in processing and refining, rare-earth futures could be the platform that helps the West take back pricing power, secures access to the inputs upon which the future of energy and manufacturing depends, and ensures the world’s most strategic commodities are priced in USD1.

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Last week, Treasury Secretary Scott Bessent made an interesting comment that got front-page billing in the South China Morning Post but basically nowhere else.

US Treasury Secretary Scott Bessent said he “would not be surprised” if China were already looking into ways to challenge the US’ pre-eminence in digital assets, given Hong Kong’s efforts to develop the industry.

When testifying before the Senate Banking Committee on Thursday, Bessent said that there are “lots of rumours of Chinese digital assets” possibly being backed by something other than its currency yuan, such as gold, but that the US could not confirm such claims.

Secretary Bessent went on to argue that this was another reason to pass the crypto market structure bill, the Clarity Act, now. Immediately. Yesterday!

Here’s the interesting thing: China has blocked all crypto business activities (trading, transactions, mining, etc.) on the mainland, and Beijing is actively constraining Hong Kong’s ambitions to become a digital assets hub through regulatory pressure, policy oversight, and strict alignment with mainland priorities. Just last week, China banned all unauthorized offshore renminbi (RMB) stablecoins. Chinese regulators previously blocked Ant Group and JD.com from issuing stablecoins and directed large local brokers to halt any research publications endorsing stablecoins.

These are not the actions of a regime that is buck wild about becoming the crypto capital of the world. And that’s just on the regulatory front. In terms of appetite for digital assets, yes, Hong Kong has a sandbox, but it pales in comparison to the size of the American crypto market.

However, Secretary Bessent is on to something. The Chinese are absolutely trying to create an alternative to American financial dominance, but the threat isn’t coming from crypto.

China’s streamlined system for cross-border RMB

A little more than a decade ago, China launched the Cross-Border Interbank Payment System (CIPS) to help streamline cross-border RMB payments. Before CIPS existed, every time a Chinese entity wanted to send a payment to a different country in RMB, the transaction had to route through a fragmented network of correspondent banks and offshore clearing centers. These payments were rejected twice as often as other cross-border payments, typically due to translation issues between Chinese characters and Latin script alphanumeric systems used by the main international banking messaging networks like SWIFT.

CIPS fixed this with clearing, settlement, and messaging capabilities — messaging in particular (which includes instructions for clearing and settlement) made CIPS a partial alternative to the Western-dominated SWIFT, though that capability is limited to direct participants and only in RMB. This transformed China’s ability to use the RMB in cross-border payments. In 2019, CIPS processed only the equivalent of $5 trillion USD. In 2024, CIPS processed the equivalent of nearly $25 trillion USD.

All cross-border payment systems have a network effect that accelerates as more banks join. As of last June, CIPS had 1,690 participants (176 Direct Participants and 1514 Indirect Participants), across 121 countries. That month, CIPS forged its first direct partnerships with six foreign banks in the Middle East and Africa — crossroads regions increasingly looking for alternatives to dollar-based infrastructure. This was a huge development as direct participation had largely been limited to Chinese institutions (which indirect participants had to settle and clear through).

mBridge and the cross-border e-CNY

Sure, CIPS is concerning because it makes it easier to use RMB in traditional financial channels. But mBridge could represent a much larger channel for global trade and finance. mBridge is a joint project launched by the central banks of China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia, in partnership with the BIS, or Bank for International Settlements (which was originally established to supervise the settlement of WWI reparations!).

mBridge is a platform for central bank digital currencies, or CBDCs — digital money issued directly by central banks. It enables instant cross-border settlements without correspondent banking, SWIFT messaging, or the need for the U.S. dollar. Instead of routing through intermediaries, mBridge converts directly between national currencies on a shared ledger, cutting transaction costs by 50% to 70% and settling in seconds rather than the traditional three days. Unlike CIPS, which only processes RMB, mBridge is designed to be multicurrency — though the majority of volume on the platform is currently the e-CNY, China’s CBDC launched in 2021.

According to a paper by the Atlantic Council, mBridge has processed more than 4,000 cross-border transactions with a cumulative value of ~$55 billion, a near 2,500-fold increase in transaction value since 2022. Although still very small in comparison to traditional financial channels, this volume makes mBridge the largest cross-border wholesale CBDC project to date. The BIS left mBridge in 2024, stating:

. . . the project has been so successful that we can declare that we have graduated out. The BIS is leaving that project, not because it was a failure and not because of political considerations but instead because we have been involved for four years and it is at a level where the partners can carry it on by themselves.

In the retail payment space still dominated by Alipay and WeChatPay, the e-CNY is starting to crop up in cross-border payments. Laos has recorded its first cross-border e-CNY transactions from Chinese tourists, and China’s Yunnan Province — which borders Vietnam and Laos — has made cross-border digital yuan payments a key priority for 2026, including QR code payments at border crossings.

An interesting e-CNY upgrade

On January 1, 2026, China became the first country to launch an interest-bearing central bank digital currency, with verified e-CNY wallets now earning interest at rates matching ordinary demand deposits. This could give the digital yuan a structural advantage over zero-yield stablecoins in cross-border transactions. If there’s any China-related rationale for including stablecoin provisions in the Clarity Act, it would be here — but this misses the larger point (are you CNY what I’m CNY?).

China is making friends

Economic integration — i.e. more commerce between countries — creates the foundation for countries to settle trade in their own currencies rather than more liquid, international vehicle currencies like the dollar. China knows this and the residual effects of their efforts to to deepen its financial and trade ties with the world could be greater use of national currencies in trade.

Canadian Prime Minister Mark Carney made his first official visit to China in January 2026 — the first by a Canadian Prime Minister since 2017. His visit yielded a new partnership focused on energy, clean technology, and trade, with Canada aiming to increase exports to China 50% by 2030. China has recently signed similar partnerships across the globe, including a new ASEAN free trade agreement in October.

Beijing wants options

Gerard DiPippo of RAND makes an excellent point in a recent Geoeconomic Competition podcast.

“If China wants to become a financial superpower, they certainly need to have a reserve currency. However, Beijing knows that there is really no prospect of the RMB replacing the dollar. More importantly they are not trying to do that. They are trying to build up enough diversification to give China optionality.”

This is the strategy Bessent needs to be focused on. China is building parallel rails so they don’t need dollar permission for trade with willing partners: CIPS for messaging and settlement; mBridge for instant cross-border CBDC transactions; bilateral partnerships that deepen trade ties and create natural incentives to settle in local currencies; an interest-bearing digital yuan that could make holding RMB for trade purposes genuinely attractive. These are the actions of a regime that wants to control its own financial destiny.

Beijing is moving forward with its digital asset of choice. It’s not gold-backed crypto. It’s a CBDC running on scalable payment infrastructure, backed by bilateral agreements, and now offering yield. Yes, we should regulate the crypto industry and Godspeed to everyone in Washington. It will, in the long run, make the industry more competitive and, of course, maintain the U.S.’s enormous lead! But let’s not conflate a regulatory sandbox in Hong Kong with China’s deadly serious efforts to rewire international trade settlement — and take share from the U.S.1

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