Exclusively by “Borysfen Intel”
Volodymyr Shevchenko
Andrii Savarets
Russia acts as a hacker state. With a full-scale invasion of Ukraine and the continuation of the war, they have already hacked the global security system. International institutions that are supposed to prevent conflicts have not worked.
Now Russia seeks to “reassemble” the global monetary and financial system.
The Russians view the introduction of the digital ruble and the consolidation of cannibalistic regimes around themselves to establish horizontal connections between local banks as an opportunity to undermine the SWIFT monopoly and the dominance of the dollar.
The democratic world must give its response to Russia’s new challenge and create a global monetary and financial system free from the defects of the previous one.
***
UN Secretary-General Antonio Guterres said at the G7 meeting in May 2023 that the global financial architecture became “outdated, dysfunctional and unfair. In the face of the economic shocks from the COVID-19 pandemic and the Russian invasion of Ukraine, it has failed to fulfil its core function as a global safety net”.
If after the First World War the central question was who would compensate for the losses caused by the war (the answer was quickly found — Germany), then the Second World War raised the question of ensuring the stability and sustainability of the world economy.
As a result, at the Bretton Woods conference, convened on the basis of the anti-Hitler coalition, in July 1944, the international monetary system of the same name was approved. The dollar, pegged to gold, replaced the pound sterling as the world’s reserve currency. The institutions of the Bretton Woods system (the International Monetary Fund and the International Bank for Reconstruction and Development) were created. And despite the fact that in 1971, with the decoupling of the dollar from gold, the Bretton Woods system collapsed, the “Bretton Woods institutions” — the IMF and the World Bank — continued to exist and personified the liberalization of global markets and financial globalization.
***
In past materials, the authors described the contours of a new global security system, which will be network-centric, multi-level and multi-circuit. The Russian-Ukrainian war, being not just a local conflict, but a full-fledged world war and a battle for what kind of world this world will be (and whether it will be at all), must resolve another contradiction and create a new global monetary and financial system.
We will try to outline the contours of such a system, which must meet the following criteria:
1. Eliminate crisis factors of the previous system
The collapse of the Bretton Woods currency system (1971) and the decoupling of the dollar from gold actually meant the ability of the United States to issue dollars with virtually no restrictions. The issue of dollars, tied to the issue of US Treasury bonds, essentially supports consumer demand, primarily in the US economy.
It is believed that under the Jamaica Accords (which replaced the Bretton Woods system), the number of currency crises especially increased, which began to be double, triple and even full in nature, covering the stock exchange, banking, currency and debt spheres.
In the modern global economy, the main challenge is the reproduction of global imbalances while simultaneously weakening global regulators. The COVID-19 pandemic has only once again confirmed the ineffectiveness of the neoliberal model of economic growth through increasing the debt burden.
The crisis of the neoliberal model is clearly visible in the graph — from 1980 to 2023, productivity growth continued to accelerate, but wage growth slowed significantly.
British journalist and publicist Paul Mason in the book “Postcapitalism. A Guide to Our Future” notes: “By the early 1980s, economic growth began to be increasingly supported by debt instruments, causing their total to rise to more than 300 % of global GDP by 2010. In the fall of 2021, the size of debt obligations exceeded $300 trillion, and their ratio to global GDP was 350 %.
…Capitalism is no longer able to adapt in the way it did during its most successful times in the early 20th century and after World War II. It no longer allows value to be created from skills and performance”.
That is, we are seeing the exhaustion of the potential for industrial growth and the inability of the service sector to create wealth — it can only be created from credit money. In turn, the ability to consume goods and services is a finite value, and accelerated credit (especially at near-zero rates) and emission (not backed by goods) stimulation provokes hyperinflation. What else Mason noted is that “the digital economy in the current structure of “classical” capitalism has contributed to an unprecedented concentration of wealth”.
That is, on the one hand, there is excessive accumulation of financial capital, on the other, the impossibility of endless expansion of markets, as a result of which the efficiency of capital is constantly decreasing. And attempts to further stimulate consumption with credit lead to a debt crisis, precisely due to the low efficiency of capital.
An attempt to revive the neoliberal model was presented by US Treasury Secretary Janet Yellen as the “modern supply-side economics”. Classic supply-side theory uses tools such as aggressive deregulation and tax cuts to promote private investment to increase potential output. Janet Yellen argues that “old supply-side economics” failed by not being able to accelerate economic growth. The “modern supply-side economics” can be reduced to a simple idea: what is needed is not a high growth rate per se, but growth that is based on inclusiveness and the principles of green sustainable development.
“Modern supply-side economics” implies:
- investments in human capital at all stages of education: from kindergarten to high school and vocational guidance;
- investments in infrastructure (both new types — broadband Internet, and traditional ones — ports, roads and railways);
- new rules for taxation of multinational capital (essentially deoffshorization).
At the same time, despite deregulation, there is an attempt to implement greater regulation of the economy by the state through active investments in education, science and innovation. Despite the fact that the “modern supply-side economics” is still within the framework of the neoliberal model and capitalist system, the drift towards greater government intervention is obvious.
In response to global challenges, the transformation of the US economy is taking place along two main tracks: reindustrialization and the transfer of vital production to US territory. The federal government invests directly and creates interconnected incentives and at the same time restrictions on businesses to create secure supply chains that are impossible under the free market.
The choice for more regulation will also be determined by:
- the desire to avoid a financial and debt crisis;
- development of technologies that allow more efficient organization of management processes;
- the desire and technical ability to solve the basic contradiction of the capitalist system and its main vulnerability, which the “modern supply-side economics” is not able to solve.
The interest rate on which the market economy is built is also its basic contradiction, which leads to a cyclical debt crisis.
Back in January 2023, the United States hit the national debt ceiling and came close to the first default in its history (although the collapse of the Bretton Woods currency system de facto led to a default).
“A default on our debts would lead to economic and financial disaster”, Treasury Secretary Janet Yellen warned.
The maximum amount of national debt is limited by law, and despite the fact that the revision of the ceiling became the subject of political bargaining, a compromise was reached in Congress and a default was avoided.
Congress approved a compromise and allowed the US national debt to increase above the already reached record $31.4 trillion. Currently, the US national debt is $35 trillion and continues to grow every second. The rule on the maximum size of the national debt will cease to apply on January 1, 2025, which means that in less than six months the question of the risk of US default will arise again.
It is impossible to resolve this contradiction while remaining within the market paradigm. Therefore, considering the danger of a financial catastrophe on a planetary scale, most likely, this problem will be solved in a way that is no longer entirely market-based.
2. Ensure the economic superiority of the Western cluster, stimulate its development and greater competitiveness
In previous works, the authors outlined the economic aspect of global changes — the upper level of international trade will be represented by macro-regional clusters:
- conditionally Western or Euro-Atlantic (including the countries of the Pacific region belonging to the conditional Western camp);
- Chinese— trying (most likely hopelessly) to catch up with the Western cluster;
- “Non-Aligned Movement”, the flagship of which will be India, which will still gravitate towards the West.
- Despotic— a cluster of world outcasts (Russia, Belarus, Iran, North Korea, Syria, etc.), which will act as a Chinese proxy.
Under the rules of the World Trade Organization (another institution created after World War II), China totally beats the United States and Europe. That is why the WTO is in a deep crisis, which is most likely man-made. The WTO has also failed to lead the world to global trade agreements.
According to the World Bank, the share of global trade in goods and services in global GDP as of 2022 was 31.1 %, which is the same as in 2005.
With the ongoing Russian-Ukrainian war and Houthi terrorist attacks in the Gulf of Aden, we can hardly expect an increase in global trade. Ultra-globalization has actually stopped, and globalization in the New World will have a cluster nature.
WTO chief Ngozi Okonjo-Iyewala is already seeing signs of states dividing into blocs, such as the fragmentation of the semiconductor market.
Due to fragmentation of trade and division into blocs, in her opinion, the global economy could lose up to 5 % of GDP in the long term.
The Western macrocluster is rapidly moving into the sixth technological structure, which will be a hybrid of information and production technologies.
***
Consonant with the “modern supply-side economics” from US Treasury Secretary Janet Yellen is a document called “Industry of the Future — A transformative vision for Europe: governing systemic transformations towards a sustainable industry”, issued in 2022.
According to the authors of the document, industry must take into account aspects that were not taken into account in Industry 4.0:
- regenerative features of industrial transformation;
- an inherently social dimension;
- a mandatory environmental dimension.
Industry 5.0 is not a technological leap, but a direction of technological transformation of industrial production for the prosperity of people, the planet, etc.
At the 2021 summit, G7 leaders announced the need to change the neoliberal paradigm known as the Washington Consensus, and that economic success should be measured not by GDP growth figures, but by the degree to which the overall UN sustainable development goals are achieved. Which implies large-scale implementation of carbon-neutral energy production.
At the same meeting, G7 leaders committed to achieving net-zero carbon emissions by 2050, cutting emissions in half by 2030, and protecting at least 30 % of land and oceans by 2030.
Thus, the Western macrocluster, through the “green transition”, plans to ensure a higher technological level of its economy by levying a carbon tax on goods produced outside the cluster using cheaper “dirty” energy.
G7 members also reportedly intend to limit China’s influence on global trade and end practices that “undermine the fair and transparent operation of the global economy”. At the same time, the leaders called on the Chinese leadership to respect human rights, especially with regard to the ethnic Muslim minority of the Uyghurs.
The current format of free trade is completely devoid of an ethical component. And the world hegemon has to manually resort to economic sanctions, wasting its reputational capital.
In the New World, the cluster globalization will make it possible to apply any tariff and non-tariff methods (including openly discriminatory ones) against other clusters that do not share the values of the Western macrocluster, be it the use of “dirty energy” in the production chain, forced labor or violation of the rights of small nations.
3. Be network-centric, but maintain the leadership and guiding role of the United States
William Burns, director of the CIA, in his article for Foreign Affairs, “Spycraft and Statecraft”, essentially formulated a rethinking of the role of the United States in the new world.
He applied it to the Middle East, but it can be extrapolated to the whole world.
“The United States is not exclusively responsible for resolving any of the Middle East’s vexing problems. But none of them can be managed, let alone solved, without active US leadership”.
The dollar, as the world’s reserve currency, is responsible for the global economy. And in the New World, the United States does not want to bear this exclusive responsibility.
The constant issue of dollars made sense in the form of stimulating economic growth, albeit at the cost of increasing public debt. And the need for the presence of the United States in all world affairs was intended to protect the hegemony of the dollar as a reserve currency.
Based on the understanding of the new format of the world economy, there is no place for a global reserve currency in the new monetary and financial system.
Therefore, the US attempt to reset the monetary and financial system will be undertaken in such a way that, in addition to eliminating crisis-producing factors, it will maintain control over it. This can be done by creating (primarily by the United States and possibly the UK as the leaders in global fintech) a new model of global cooperation in the field of resilient finances and regulation of financial services, as well as offering a technical platform on the basis of which this model will operate.
There are four (non-mutually exclusive) scenarios for the reorganization of the global monetary and financial system:
- “World money”— the creation of a supranational monetary unit, which should be issued by a supranational body.
- “Sovereign money”— strengthening of sovereign centralized control over the money supply (for example, 100 % reserves, as under the gold standard), which is accompanied by an increase in global monetary regulation through the IMF.
- “Digital money”— the use of centralized and decentralized, secured or unsecured cryptocurrencies.
- “Regional money”— the creation of currency unions and lowering the level of control over money issue from global to regional.
Based on the outlined criteria that the New World’s monetary and financial system must meet, we assume that the fifth scenario will be implemented — digital freely convertible currencies secured by central banks, circulating either within a single technical platform, or different but interoperable ones.
***
According to the Atlantic Council, 130 countries around the world are now exploring the prospect of creating digital central bank money. This is about 98 % of global GDP. Today, 64 countries are already in the extended research phase (development, piloting or launch). Currently, 66 countries are in the advanced phase of exploration — development, pilot, or launch.
The National Bank of Ukraine announced a second experiment on the use of digital hryvnia (e-hryvnia) until the end of 2024. Anyone can take part in it.
The NBU conducted the first experiment on the use of e-hryvnia in 2018, becoming one of the first central banks in the world to begin testing the use of digital money. Moreover, both developed democracies and autocratic openly cannibalistic regimes are introducing (or planning to introduce) digital money.
The Central Bank of Russia has allowed the use of digital money in international payments.
On the one hand, digital money has already acquired a certain background, ranging from a misunderstanding of the very essence of digital money to conspiracy theories. On the other hand, the paucity of information from authorized bodies and weak government communications contribute to this.
The Center for Strategic Communications and Information Security blamed the Moscow narrative on a blogger who suggested that digital money could be limited in terms of validity and area of use.
But the truth is that Moscow, Kyiv, Beijing, and Brussels are developing digital currencies and preparing the necessary regulatory framework (and it has already been implemented in Ukraine).
What is digital currency?
Central Bank Digital Currency (CBDC) is digital money issued by the government.
CBDC should not be confused with non-cash money, virtual currency, cryptocurrency, money surrogates or electronic money.
Despite the fact that CBDC is a de facto cryptocurrency, it has distinctive features:
- centralization — CBDC is issued purely by the central bank;
- openness — CBDCs are not anonymous, on the contrary — all transactions are fully traceable.
- programmability — the central bank can program the rules and restrictions on the use of currency, the contours of its circulation, validity period, etc.
What will the digital currency be tied to and will it be?
To answer this question, it is necessary to understand the motivation of the potentially main instigator of the introduction of a new monetary and financial system, namely, to ensure its superiority.
First, there is reason to believe that the digital currency will be “asset-backed”, primarily with physical gold (or a metal basket).
Secondly, with industry, primarily — with high-tech industry, so as not to give all the trump cards to China.
Thirdly, the countries of the Global South would like to be tied to natural resources and raw materials, but this will be contrary to the plan, since despotic regimes — Russia, Iran, Syria — will receive benefits. This means that the basis must be something in which the West feels its advantage. It could be some new type of energy.
Based on the assessment of these three components, exchange rates will be formed, which will be constantly calculated by a quantum supercomputer.
The main question is: why?
- irreversible development of technologies that make it possible to manage previously uncontrollable processes;
- reduction of transaction costs;
- crisis of the neoliberal model and capitalism in general;
- technical ability to limit overconsumption and excessive accumulation of capital;
- avoiding crisis bubbles;
- fight against the shadow economy;
- regulation of the economy.
What does the introduction of digital money give?
Targeted funding: Digital money will only be able to be spent on specific purposes, such as food, housing or education, and will not be able to be spent on alcohol or drugs. Such a system has long been introduced in the United States (food cards) and something similar was tried by Ukrainian refugees in Europe.
Automatic payments: Smart contracts can be used to make automatic payments for goods or services once a certain condition is met. For example, your rent may be automatically deducted from your account every month.
Supply chain management: Programmable money can be used to track the movement of goods through the supply chain.
Creating new business models: Programmability opens up new opportunities to create innovative business models that were not previously possible.
Limiting excess consumption: strictly regulate the purchases assortment, withdraw unspent balance, etc. The West has also already come up with a “system of voluntary consumption restrictions” — an unconditional basic income, but with the introduction of digital money, control procedures are simplified.
The excess resource accumulated in a system with limited consumption will, in fact, be a substitute for credit and used for economic growth.
Regulation of excessive accumulation of capital: capital not invested in the economy (most likely in the real sector) will “burn out”. Likewise, as a capital that is the result of illegal enrichment or of unknown origin.
Creation of several circulation circuits: for retail, for budget or enterprises’ payments, or for the entire states, for purchases assortment, etc.
Improvement of currency regulation: over time, commercial banks will no longer be needed — central banks will be able to independently perform all functions without unnecessary intermediaries.
Reducing corruption, debureaucratization: the introduction of digital currency will automate processes such as paying taxes, social contributions, and paying fines, which will minimize or even completely eliminate corruption, and accordingly radically reduce the bureaucracy.
Deoffshorization: digital money can enable transparent competition between jurisdictions.
***
Digital Dollar Vs New Payment System
There are currently three powerful trends in public and professional discourse in the United States:
- launch of FedNow;
- continued study of central bank digital currencies (CBDC);
- evolution of Open Banking.
In 2023, the US Federal Reserve introduced a new system for instant payments, the FedNow Service. Now hundreds of banks are connected to the system.
FedNow offers not only 365/7/24 processing, but also functionality that cryptocurrency and blockchain advocates have long championed: making it easier to move money.
By continuing to use commercial banks as intermediaries, Fed officials previously said it would allow payments to be processed in seconds, which is already the norm in many other jurisdictions around the world. At the same time, the Fed constantly emphasizes that “The FedNow Service is not related to a digital currency”.
The US Treasury Secretary also confirms this: “The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash”.
At the same time, the US Treasury does not hide the fact that the United States is seriously considering the possibility of creating a central bank digital currency (CBDC). And this is not just “considering the possibility”, but serious work. US President Biden has issued an executive order establishing a working group to develop the contours of a possible future financial architecture.
If FedNow is about the speed of payment processing, but with the preservation of the existing currency system, then the introduction of the digital dollar is, in fact, the establishment of a new world currency system following the example of Bretton Woods. And the central bank digital currency will have its own payment ecosystem.
However, the implementation of CBDC will face several challenges:
- the fate of not only commercial banks, but also the commercial central bank, which de facto is the US Federal Reserve;
- reformatting the principles of functioning of the global stock market;
- technical issues related to the circulation of cash;
- the position of Donald Trump, who said that he would not allow the creation of a digital dollar if he became President of the United States.
Conclusions:
1. Digital money is a synthesis of all world achievements in the field of administrative distribution of money, which has nothing to do with the classical free market. The main risk for the consumer is that digital money lacks an important function inherent in ordinary money — they are not a means of accumulation due to their programmability.
2. The introduction of a new monetary and financial system will not be smooth and “seamless”, but rather, on the contrary, will be accompanied by a financial crisis, which the world may enter as early as 2025 due to the debt crisis of the United States. This will mark the transition to post-capitalism. The decline of the credit economy will not mean the absence of loans, just as the transition from slavery did not mean the absence of slavery. But capitalism as we remember it will become history. How liberal capitalism became history during the Great Depression, with which the world coped through World War II.
3. The introduction of modern digital tools, in particular digital money, finally inverts Marx’s pyramid — now it is based not on economics, but on politics. Roughly speaking, instead of industrialists and financiers, the elite become bureaucrats who distribute benefits.
4. In the era of the development of social networks and digital technologies, controlling human behavior is becoming a fairly easy task. This was perfectly demonstrated by the COVID-19 infodemic. Behavior is controlled using virtual instruments. In this case, the object of interest will be the results not of labor, but of social activity.
5. Building a digital society is an objective process, and you can only influence two things:
- speed of construction (you can bring this “wonderful” moment closer, or you can delay it);
- format (hard — Chinese/Russian one, or soft — conventionally Western).
6. The development of new technologies, be it artificial intelligence or digital money, is irreversible, and their implementation is associated with enormous risks for humanity. Their use for good will depend entirely on whose hands they are in. If this happens within the framework of a democratic world, then there is a minimal chance that the checks and balances will not allow a hard scenario to follow.
7. There is a good chance that the “soft Western format” will be tested in Ukraine.
| About the Authors: | |
 |
Volodymyr Shevchenko, the former aide to the Secretary of the National Security and Defense Council of Ukraine, Doctor of Philosophy |
 |
Andrii Savarets, Chairman of the Center for Digital Economy Development |
