Money is power, and power is money, as everyone knows. So it's worth paying special attention to the technological revolution that’s about to disrupt the world’s money flows at the very moment global political power is shifting from familiar foundations. Cryptocurrencies won't change the global balance of power alone, but they will speed and distort the changes underway.

This revolution is the simple promise that decentralised ledgers, sophisticated algorithms and massive computing power will allow the transfer of money, stocks and other property at the cost of an email and with the security of an armoured truck.

These technologies will spread fastest in tyrannies, where as central bank digital currencies they become tools of government control, and in failed states, where as private cryptocurrencies they offer savings and payment mechanisms that don’t otherwise exist. If liberal democracies don’t encourage faster innovation, develop more balanced regulations and reinforce the strengths behind their markets, then economic and political power will flow elsewhere.

There is a version of the future in which not much changes. The world's largest economies continue to host the largest flows of these new financial assets, setting the rules for transfers, reporting and taxation. Old intermediaries, custodians and payments systems wither away, in the extreme vision, and new mechanisms take their place under the watchful eyes of the current regulators.

But that doesn't feel quite right, because the assault on legacy financial infrastructure is also an assault on government control in general and the dollar in particular. The emergence of these technologies fuels shifts in political power that are already underway within and among countries, especially among the world’s largest economies.

Challenges to liberal democracy

In many western democracies, the emergence of digital assets coincides with a moment of greater political populism. The earliest ‘crypto-bros’ pushed a deliberate agenda to protect against government and corporate intrusion, and their anger dovetailed nicely with President Donald Trump’s case that the ‘Deep State’ is rigged. Together, they now embrace bitcoin as ‘digital gold’ as the dollar weakens, even as they block the Federal Reserve from developing a CBDC.

Elsewhere, governments struggle to strike a balance between El Salvador’s embrace of bitcoin as legal tender and the Taliban’s outright crypto ban. Most regulators have been cobbling together rules that preserve their control of financial stability and tools to track criminals, while hoping they leave enough flexibility for innovation and privacy protection.

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If liberal democracies don’t encourage faster innovation, develop more balanced regulations and reinforce the strengths behind their markets, then economic and political power will flow elsewhere.

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If cryptocurrencies chip away at the traditional prerogatives of all regulators, however, they pose special challenges to the regulators of the world's dominant currency. Even as the Chinese government cracks down on cryptocurrencies at home, the digital renminbi is key to its agenda abroad to promote an alternative to the dollar. The European Central Bank has similar ambitions for its currency, in hopes that broad adoption of a digital euro will reduce borrowing costs and reinforce the continent’s ‘monetary sovereignty’.

Monetary sovereignty is the polite term for undercutting Washington’s extensive use of financial sanctions against criminals and rogue governments. Russia, Iran and Venezuela have all experimented with their own digital currencies to avoid sanctions. The most promising effort, however, is Project mBridge, a prototype to settle payments in CBDCs and avoid dollar settlements altogether. China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia are among its principal sponsors after the Bank for International Settlements withdrew.

The Trump administration’s launch of a strategic bitcoin reserve in March fulfilled an election promise and was justified in part as a hedge against the likely weakening of America’s own currency. If others follow America’s lead, countries may scramble to control the computational power that validates bitcoin transactions.

A plan for the future

Just how much all these forces may erode government power or undercut the dollar’s reserve status remains unclear. But with dictatorships tempted to use digital currencies to reinforce their authority and weak states forced to surrender to these powerful technologies altogether, liberal democracies must find ways to get the design right of these new currencies.

Above all, research programmes and market incentives need to support faster innovation in digital assets that remain in their infancy. At the same time, regulators must develop frameworks that balance reliability and innovation, security and convenience, law enforcement with privacy. But these frameworks must not be allowed to raise doubts about financial stability.

Most important, however, will be the reinforcement of the traditional institutions that make the US, Europe, Japan and other advanced democracies such attractive long-term investments. Currencies reflect the business models that stand behind them, whether they are in leather wallets, bank accounts or distributed ledgers.

Especially amid the populism that drives much of the enthusiasm around cryptocurrencies, governments need to redouble their commitments to reinforce entrepreneurial ecosystems, advanced research laboratories, independent courts and all the democratic institutions that support innovation and growth, but also reliability and transparency.

Without a deliberate agenda to guide and shape the crypto revolution, it’s difficult to see a happy next chapter in the world’s shifting geopolitical balance.