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Decentralize to Survive: Reinventing Global Economies on Chain

The most pressing international problem that the United States faces today is the broken global financial system. To revamp the current financial system and eliminate this need for trust in a small group of people, the United States should encourage further adoption of a global blockchain-based economy. The current financial system is at best opaque and often inoperable for the majority of Americans. With this current system, a relatively small group of people can cause the Great Recession and the Housing Crisis of 2008. For most Americans, this was a one-time event, but for people around the world, a broken, corrupt financial system is the daily reality.

Roadmap

In this paper, I will discuss how the current US financial system is broken, how the US should take a constructivist approach when solving these issues, and some examples of global economies these solutions could assist. I will also explore why the US should take this constructivist approach and maintain its global economic position and the issue of energy inefficiency with blockchain technology.

Connecting Constructivism and Cryptocurrency

The primary issue with the current American financial system is that it requires trust. However, trusting someone whose incentives are not necessarily aligned with your own is bound to have negative consequences. As Alexander Lipton and Alex Pentland write in the Scientific American, “[The U.S. Federal Reserve] has repeatedly chosen to make the little guys poorer by diluting their financial obligations through inflation, suppressing interest rates and other policies” (Lipton and Pentland, 2018, 1). As Constructivists argue, and as Alexander Wendt explains in Constructing International Politics, ideas matter (Wendt, 1995, 73). The current financial system requires the American people to believe that the Federal Reserve and other institutions have their best interests in mind and are capable of accomplishing what is necessary to achieve those goals. However, these are humans too, and humans are not infallible, as made apparent in the 2008 financial crisis.

The United States is far from the only country with a financial system that requires absolute trust in a small group of people. The Greek Financial Crisis of 2009 was triggered by the Great Recession of 2008; however, its underlying cause was that the Greek government had taken on an enormous amount of debt on an already unstable currency and then lied to the Greek populace about the amount of debt it had taken on. Currently Greece has debt payments scheduled through 2060 as a result of this disaster.

Adoption and Trust On-Chain

To revamp the current financial system and eliminate this need for trust in a small group of people, the United States should encourage further adoption of a global blockchain-based economy. With the current volatile state of cryptocurrency, serious conversation around this solution is difficult. However, if the United States were to take a stronger stance in favor of cryptocurrency and a blockchain-based financial system, cryptocurrencies would achieve mass adoption much faster. This way, people would be able to enjoy the benefits of decentralization without having to suffer the volatility in prices. Currently, the total market capitalization of all cryptocurrency is just over one trillion dollars; this needs to reach ten to twelve trillion to make up any significant part of the global economy. If the US were to take a stronger stance in favor of cryptocurrency, it would push this new digital economy forward rapidly.

American adoption of cryptocurrency would allow for the US to hold global power in a non-militaristic manner. Just as Venezuela and El Salvador have adopted Bitcoin more fully into their own economies, the United States could do the same and promote access to cryptocurrency to countries that have technology infrastructure but corrupt financial systems, including many countries in Latin and South America as well as Eastern Europe. This would allow for the United States to maintain its global influence but in a more economic as opposed to militaristic form.

Why the United States Should Seek an On-Chain Economy

The United States should take this constructivist approach to the economy and maintain global dominance because the world does not know the alternative. The United States has created a world order that fosters a larger number of democracies globally and greater global prosperity overall. As Robert Kagan writes, “If American power declines, this world order will decline with it. It will be replaced by some other kind of order, reflecting the desires and the qualities of other world powers” (Kagan, 2012, 1). American excellence may or may not be a myth, but the reality is that the current world order has shown an improving quality of life for much of the global population. As Stephen Brooks notes in his debate with Barry Posen at the 2019 EISS keynote, if the United States is not the leading power, the world cannot be certain what the next leading power will bring. Because the United States does not know for certain that another state could do a better job leading the world, it should continue to try to maintain this position.

What about the Environment?

According to a January 2020 Pew Research study, 70% of Americans believe the current economic system favors the powerful. This shows that most people believe there needs to be change to this system. However, when a blockchain-based system is brought into discussion, many people will rebuke the idea because it is too energy-intensive and harmful to the environment. And recently we have seen the effects of environmental strain. As Sarah Kaplan notes in her piece on the Amazon rainforest, satellite images are now showing the effects of environmental pollution on one of the world’s most necessary “carbon sinks.” The University of Cambridge found that Bitcoin, the cryptocurrency with the largest market capitalization, generates 132.48 terawatt hours of electricity annually, surpassing Norway, to put that in perspective. This is not healthy for the environment; however, new blockchains, including Etheruem, Solana, and Avalanche, to name a few, have created a new form of transaction validation called Proof of Stake (as opposed to Bitcoin’s Proof of Work) that is faster and more energy-efficient. This shows that innovation in the blockchain space is pointing in the direction of energy-efficiency and a focus on the environment.

Adoption of cryptocurrency and a constructivist approach could assist the United States in becoming one of the leading nations to adopt this new technology that is already on a path to disrupt traditional finance. In the financial realm, the idea of trust matters more than anything; that is why the United States should take a constructivist approach and push for the full adoption of a global blockchain-based economy.