Flourishing Together: Like Sterling and Gold, Like Dollars and Bitcoin

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Was the war in Ukraine a turning point for crypto? Oleksandr Bornyakov, an official at Ukraine’s digital ministry, commented that “Crypto assets proved extremely helpful in facilitation of funding flows to Ukrainian citizens and soldiers, as well as in raising awareness and engaging people worldwide.”1 The Ukrainian government crowdfunded $56 million in crypto within three days, in addition to $63.8 million raised through the Ukrainian NGO Come Back Alive.2 Some in the Bitcoin and DeFi communities saw this as proof of crypto’s superiority over fiat currency, and perhaps even a prelude to a “Bitcoin Standard”.

Regulators and lawmakers, on the other hand, worried that crypto could make our financial system less stable and less safe. Senator Elizabeth Warren, who represents banking industry interests, appeared unmoved when the Financial Crimes Enforcement Network (FinCEN) deputy director testified that “you can’t run a G20 on cryptocurrency, there just isn’t the liquidity.” These worries persist in large part thanks to journalists at places like the New York Times, which early in the war published an alarmist report titled “Russia Could Use Cryptocurrency to Blunt the Force of U.S. Sanctions,” even appearing to suggest that the Russians were close to launching a digital ruble.3 One is nonetheless left with the impression that, whatever happens in Ukraine or Russia, crypto advocates and skeptics both seem to think that crypto’s advance means the dollar’s retreat.

History offers a different hypothesis, one equally at odds with both the cypherpunks and regulators. The early 1800s, when sterling and gold rose to dominance in what is known as the classical gold standard, suggests that if the US imitates Britain and actively creates deep American crypto markets, then, just as sterling and gold dominated the nineteenth century, dollars and bitcoins will dominate the twenty-first.

Sterling, Gold, and Bonds

The world of the first era of globalization was more tightly knit together than any time before thanks to the transportation technologies of the Industrial Revolution and global European empires. More importantly, “the golden age of financial market integration and capital mobility described above was also the era of the classical gold standard,” when the largest economies locked their exchange rates together by making their currencies convertible into gold.4 Much of the academic literature on the gold standard thus focuses on questions of currency stability and the balance of payments.5

These concerns are not entirely misplaced. Currency exchange interventions and “beggar-thy-neighbor” depreciations were at the core of Europe’s political instability in the 1930s and the Great Depression, the rise of Asia’s export-oriented economies in the 1950s and 1990s, and the US role as involuntary “consumer of last resort” after the 1970s.6

However, what gets forgotten is the relationship between public finance, the gold standard, and sterling. Public finance in the 1700s and 1800s was not oriented towards welfare or infrastructure spending. Large deficits and bond issuances were for waging war. And the Napoleonic Wars were the largest of them all.

Following Napoleon’s defeat, London emerged as the center of public finance in no small part due to the Rothschild banking family, which began the practice of underwriting sterling-denominated bonds in London and allowing investors all over Europe to buy and sell them. The 1818 Prussian bond in particular was immediately recognized as a watershed moment in European finance. First, instead of being paid in thaler, the bond was to be paid in sterling in London. Second, the bond was to have an English-style sinking fund. Investors in London, Frankfurt, Berlin, Hamburg, Amsterdam and Vienna could buy, collect interest on, or redeem these Anglicized bonds at any Rothschild house.7

Sterling bonds for the Hukuang Railways, with a sinking fund due in 1911.

The Rothschilds created a model for international bonds that quickly spread and fueled London’s rise to the center of European public finance, creating a variety of network effects for sterling. European countries joined the gold standard as means of minimizing the currency fluctuations between their revenues and their sterling-denominated debts. But this was not immediate. The British adopted the gold standard in 1821, the Portuguese in 1854, and a new united Germany only in 1870. Countries not on gold needed to at least bow to sterling if they wished to access London’s financial markets. Even the Qing Empire, ruling a vast realm where silver reigned supreme, issued sterling-denominated bonds when it sought foreign financing to finance railroad construction, and also to pay off indemnities imposed in 1895 and 1901 following its defeats in the First Sino-Japanese war and the Boxer Rebellion.8

The lesson is clear. Sterling and gold flourished together, underpinned by the network effects of London’s dynamic, open financial markets.

Dollars and Crypto?

This history is especially valuable today. As I’ve written before, I am quite skeptical of Zoltan Pozsar’s “petro-dollar” framework and his conclusions that the dollar is now in decline against other currencies, such as China’s renminbi, which he sees as ultimately backed by physical and digital commodities like oil and Bitcoin.9 BitMex founder Arthur Hayes made much the same point in his essay “Energy Cancelled,”10 which argued that the US sanctioning of the Russian Central Bank will lead foreigners to dump Treasuries for Bitcoin. Pozsar, Hayes, and other writers allude to a new world monetary order they dub “Bretton Woods III.” They think this will replace today’s “Bretton Woods II,” based on the fiat dollar, which started in 1971 after the end of the original Bretton Woods gold-exchange dollar system.

But this is to miss the lessons of the classical gold standard which preceded Bretton Woods. Does Ukraine’s success in crypto fundraising mean that the dollar has lost ground? Not quite. Unlike Britain in the wars against Napoleon, Ukraine is not fielding land armies across Europe. The challenge then for the anti-French alliance was equipping their armies with cold, hard cash (not paper) so that they could provision themselves without looting, since “taking supplies at gunpoint has the disadvantage of making an army unpopular and food scarce, while extended supply lines are a source of vulnerability. In protracted campaigns like Wellington’s in the Iberian peninsula… it was essential to be able to purchase supplies and to pay troops.”11

To paraphrase Ukrainian president Volodymyr Zelinksy’s poignant quip last month, “I need ammunition, not a new currency.” Ukraine is not using crypto for soldiers marching across Russia. And even $120 million in crypto pales against the billions in munitions and arms provided by NATO and the US. In the realm of war-related public finance, at least, the dominance of the American defense industry buttresses the dollar. American weapons will always be bought with American dollars.

A Section 230 for Decentralized Finance

Things are even more promising for the dollar if we look beyond the current war. Sterling became the world’s dominant currency not just thanks of London’s bond market, but also thanks to London’s money markets. The 1844 Peel Act clarified and simplified the rules governing banks, joint-stock banks, and bill discounters. By the 1870s, when Walter Bagehot wrote his famous essays for the Economist, the dynamism of the City of London had made it the largest repository of demand deposits and the center of bill discounting (a type of trade finance) in Europe.

US financial markets today underpin the dominance of the dollar in much the same way. The paradox of the US’s declining relative share of GDP and the dominance of the dollar disappear when we consider the deep network effects that emerge from the relationship between dollar safe assets, open US financial markets, and the dollarization produced by dollar invoicing in international trade.12

The historical lesson is clear—for the dollar to remain dominant, the US must retain the deepest, most dynamic financial markets. DeFi today is already dollarized—when was the last time you saw, much less touched, a Euro-pegged stablecoin? The US should double down on its lead, now that DeFi is regulatorily stifled in Europe and China. Fortune favors the bold. Bold American regulators could advance the national interest by ensuring new digital fortunes are made in the US and denominated in dollars.

As I’ve written before in “Jerome, Son of Paul," in historical perspective Bitcoin looks like gold before 1979, while DeFi is closer to the software revolution of the 1990s. We can take that analogy further. The American tech industry rose to near-undisputed world dominance thanks to one of the few thoughtful laws passed by the US Congress in the postwar era—the 1996 Communications and Decency Act (CDA). Section 230 of the CDA created a regulatory “special economic zone” where internet platforms and forums would be exempt from the civil liability binding newspapers and traditional publishers. The rationale was that this exemption created a “Good Samaritan” dynamic where network platforms could moderate and even censor content without liability if libelous or harmful content slipped through. This arrangement allowed the network platforms to scale to immense scale and value.

A Section 230 for DeFi would have the following three components:

  • No Virtual Asset Service Provider (VASP) status for developers of decentralized protocols. Code is already protected as free speech, and decentralized protocols have no intermediaries providing exchange, custody, or transfer services; DeFi users transact directly with each other.
  • Exclude DeFi exploits from the Computer Fraud and Abuse Act (CFAA). Exploits occur when a user interacts with a protocol, as its code is written, and profits by taking advantage of arbitrage opportunities or design weaknesses. As long as users do not break other criminal laws, exploits help DeFi by exposing buggy code.
  • No banking charter requirements for stablecoin issuers like Circle and Tether. Unlike bank deposits, users can sell their USDC or USDT without redeeming them with Circle or Tether. Thus, since these stablecoins cannot produce “bank runs,” they should not be subject to banking-specific regulations nor should they be able to receive bank-specific guarantees like deposit insurance.


American financial dominance is a pillar of American power. Luckily for the dollar, technological revolutions are an opportunity to entrench the ingredients of financial dominance. DeFi and crypto public finance—in other words the web3 bond market—are overlooked in favor of trendier topics like NFTs, payments, and wallets. But in terms of geopolitics, Bored Apes matter little. Sterling and gold rose to dominance in just over a decade. We might just be on the cusp of such a turning point in the history international finance, one where the dollar and Bitcoin will reign supreme; as in the 1820s, we might see a quick succession of sovereign governments issuing Bitcoin- and Ethereum-backed bonds, payable in dollar stablecoins. In such a world, while Bitcoin will join US Treasuries as a favored reserve asset, the dollar will remain unparalleled as the unit of account of both war and trade.

  1. Sara Elbeshbishi. “$120 million and counting: How the ‘first crypto war’ is unfolding in Ukraine,” USA Today, March 21, 2022. URL; Steven Levy, “Crypto Goes to War,” Wired, March 25, 2022. URL ↩︎

  2. Casey Wagner. “Impossible for Russia To Evade Sanctions With Crypto, FinCEN Rep Says,” Blockworks, March 17, 2022. URL ↩︎

  3. Emily Flitter, David Yaffe-Bellany. “Russia Could Use Cryptocurrency to Blunt the Force of U.S. Sanctions,” The New York Times, February 23, 2022. URL ↩︎

  4. Michael D. Bordon. “Globalization in Historical Perspective,” Business Economics, January 2002. Remarks prepared for the NBER session “International Economy: Globalization and Crises” at the NABE Annual Meeting, September 2001. ↩︎

  5. Michael D. Bordo. “ The Gold Standard, Bretton Woods and Other Monetary Regimes: an Historical Appraisal” in Dimensions of Monetary Policy: Essays in Honor of Anatole B. Balbach. Federal Reserve Bank of St. Louis Review Special Issue. April-May 1993. URL ↩︎

  6. Barry Eichengreen. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. Oxford University Press, 1996. Michael Pettis. The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy. Princeton University Press, 2013. ↩︎

  7. Niall Ferguson. The House of Rothschild: Volume 1: Money’s Prophets, 1798-1848. New York: Penguin Books, 1999. ↩︎

  8. Ghassan Moazzin. Foreign Banks and Global Finance in Modern China: Banking on the Chinese Frontier, 1870-1919. Cambridge: Cambridge University Press, forthcoming summer 2022. URL ↩︎

  9. Zoltan Pozsar, “Global Money Dispatch,” Credit Suisse. February 27, 2022 ↩︎

  10. Arthur Hayes, “Energy Cancelled,” Medium, March 16, 2022. ↩︎

  11. Ferguson, 157. “Napoleon’s celebrated aphorism—“An army marches on its stomach”—left open the question of how that stomach was to be filled… All the armies which fought in Europe between 1793 and 1815 resorted at times to the age-old practice of requisitioning provisions from civilian populations.” ↩︎

  12. Gita Gopinath, Mr.Federico Diez, and Pierre-Olivier Gourinchas. “Dominant Currency Paradigm: A New Model for Small Open Economies.” International Monetary Fund, Nov 22, 2017. ↩︎