This episode reveals how the U.S. weaponizes the dollar system, inadvertently accelerating a global race to build alternative financial networks and creating a historic opening for crypto.
The Evolution from Physical to Digital Sanctions
- Historically, enforcing sanctions required military force. Fishman cites the 1990s UN embargo on Iraq, which was maintained by a multinational naval blockade physically stopping oil tankers. Commandos would board ships to ensure compliance.
- The shift occurred with hyperglobalization, the post-Cold War integration of countries like China and Russia into the dollar-based financial system. This created new "choke points" in the global economy.
- Choke Points are defined as parts of the global economy where one state has a dominant, non-substitutable position. The most critical choke point is the U.S. dollar, which is on one side of 90% of all foreign exchange transactions.
- Fishman contrasts the old and new methods: "That's not how the US stopped Iran from selling oil. It was by going to banks in places like China and India and Turkey... and said, 'If you were processing payments for Iranian oil, you have to comply with our policy or we're going to cut you off from the dollar.'
The Iran Sanctions: A New Paradigm of Financial Warfare
- In the mid-2000s, the Bush administration faced the challenge of Iran's growing nuclear program without the appetite for another war. Traditional sanctions were seen as ineffective.
- Stuart Levy, then the Under Secretary of the Treasury, developed a new approach. Instead of seeking government-to-government agreements, he engaged in "government-to-business diplomacy."
- Levy and his team met directly with global financial institutions, presenting declassified intelligence showing how Iran was using their services to fund its nuclear program and terrorist proxies.
- This strategy persuaded most major banks to voluntarily cut ties with Iran to avoid reputational damage, effectively isolating the country from the international financial system without a single shot fired. This was a stark departure from the naval blockades used against Athens' rival Megara in the Peloponnesian War.
The Mechanics of Being Cut Off from the Dollar
- For a country like Iran, being cut off makes international business nearly impossible. Even trade between two non-U.S. countries, like India and Saudi Arabia, often settles in dollars through correspondent banks in New York.
- The U.S. employs secondary sanctions, which threaten to cut off any third-party entity (e.g., a European bank) from the dollar system if it transacts with a sanctioned entity. This forces global businesses to choose between accessing the U.S. market or doing business with the sanctioned country.
- The consequences for the target nation are severe: inability to conduct trade, currency depreciation, high inflation, and a decline in living standards. Fishman notes, "The brunt of these sanctions is really felt by everyday people."
The 2022 Russia Sanctions: A Modern Test Case
- The G7 nations targeted Russia's financial and technology sectors, imposing blocking sanctions on its largest banks and removing them from SWIFT, a Belgium-based financial messaging service.
- The most impactful measure was freezing approximately half of Russia's $630 billion in sovereign reserves. Russia had tried to "sanction-proof" its economy by diversifying its reserves away from U.S. Treasuries and into euros, a bet that proved catastrophic when Europe joined the sanctions effort.
- Russia cleverly circumvented some pressure by forcing its state-owned energy companies, like Rosneft and Gazprom, to sell 80% of their foreign currency earnings for rubles, effectively using their balance sheets to prop up the currency.
- Fishman, who was personally sanctioned by Russia, notes the sanctions were less comprehensive than those on Iran due to Western fears of disrupting global energy markets and causing inflation at home.
The Origins of US Dollar Supremacy
- The 1944 Bretton Woods Agreement established the dollar as the global reserve currency, but it was pegged to gold. The system was rigid, with capital controls limiting international finance.
- In 1971, President Nixon unilaterally ended the dollar's convertibility to gold. This move, combined with the Arab oil embargo, was initially seen as the end of American economic dominance.
- The turning point came in 1974 when Treasury Secretary Bill Simon struck a deal with Saudi Arabia. The Saudis agreed to price oil in dollars and reinvest their profits in U.S. debt, creating the petrodollar system. This linked the dollar to oil, the world's most critical commodity.
- This, along with financial deregulation and the rise of the offshore Eurodollar market, cemented the dollar's role and created the hyper-financialized system that exists today.
The Future of Global Finance: Fragmentation and New Challengers
- Countries are accelerating efforts to build payment systems that bypass the U.S. financial system. China is leading this push with its Central Bank Digital Currency (CBDC), the e-CNY, and MBridge, a multi-CBDC platform for cross-border payments developed with other central banks.
- Russia has largely "yuanized" its economy, settling most of its trade in the Chinese renminbi.
- Fishman warns that this trend isn't limited to U.S. adversaries. Recent unilateral U.S. tariffs have even prompted allies like Canada and Europe to explore ways to reduce their dependence on U.S.-controlled payment rails. Fishman states, "If the US is just weaponizing the dollar and American technology against everybody else, there's going to be an incentive to hedge."
Stablecoins: America's Accidental Superpower?
- While China and Europe develop government-led digital currencies, the U.S. has largely relied on the private sector to innovate with dollar-pegged stablecoins.
- Fishman draws a parallel to the 1970s Eurodollar market, an initially quasi-illicit offshore market that the U.S. eventually co-opted to expand the dollar's influence. He sees a similar dynamic playing out with stablecoins.
- For Crypto AI investors, this positions stablecoins as a critical strategic asset. Their success could either reinforce U.S. financial dominance in a digital era or, if poorly regulated, create systemic risks. The legislative outcome of bills like the one referenced as the "Genius Bill" will be a key indicator of the U.S. strategy.
Crypto's Role: Sanction Evasion or Economic Freedom?
- Fishman is skeptical that crypto can end U.S. sanctions power, pointing to the massive fine against Binance and the U.S. government's ability to target infrastructural "choke points" like cloud computing providers that miners rely on.
- However, he acknowledges that cryptocurrencies, particularly dollar-backed stablecoins, can serve as a vital tool for individuals in authoritarian or high-inflation countries to protect their wealth and access a stable currency.
- He argues that the alternative to effective economic sanctions is often not peace but military conflict. The goal should be to use these powerful tools more intelligently and sparingly to avoid driving the world toward more dangerous alternatives.
Conclusion
The escalating use of economic sanctions is accelerating a global shift away from dollar-centric finance. This creates a critical opening for decentralized networks and stablecoins to capture market share. Investors and researchers must monitor the geopolitical race to build new payment rails, as it will define the next era of global finance.
