National currencies will face digital monetary competition Think about what happened with newspapers: First, they all went online. Then, Google News indexed them all. Last, local papers found that their geographic monopolies had evaporated now that it was no longer necessary to distribute physical newspapers via trucks. A similar fate will befall national currencies. Already, national currencies compete with cryptocurrencies because individuals and institutions hold digital wallets filled with various assets that can be traded against one another. This will only accelerate once central bank digital currencies (CBDCs) are introduced. Every asset will be traded against every other asset in a gigantic table we call the “defi matrix” (defi is short for decentralized finance), including CBDCs themselves. We are about to enter an age of global monetary competition, where national currencies must earn their place in someone’s wallet portfolio every hour of every day, even among citizens of their own countries. The digital version of the Japanese yen will be plunged into head-to-head global competition with the Swiss franc, the Brazilian real, and any other asset with an open capital account, including Bitcoin. Everyone becomes a foreign-exchange trader, all the time, and only the best national currencies—or cryptocurrencies—are ever held by anyone. Rather than the current environment of unchecked inflation and competitive devaluation, the defi matrix imposes a new kind of discipline on national currencies, as billions of people make individual choices regarding which currencies to hold—or not hold.

[An] argument that states necessarily control the “physical environment”—a concept known as “territoriality”—may not actually hold: A government that doesn’t understand the digital may not be able to control the physical. Less capable states will attempt to maintain control by making futile, reactionary attempts to regulate emerging physical technologies back into the garage from whence they came while more capable jurisdictions will embrace them. In other words, it’s short-sighted to think technology will remain indefinitely confined to the digital realm. States will need to reinvent themselves as masters of new technologies, both digital and physical—or fall behind and witness their best citizens leave for jurisdictions that do.

Crypto protocols, by contrast, allow millions of active participants—both customers and producers—in a market to develop decentralized regulatory mechanisms that avoid both the perils of captured state regulators and corporate self-regulators. It is only a matter of time before cloud-based entities emerge for decentralized regulation of industries beyond cryptocurrencies. Importantly, these bodies will be truly global and boundary-spanning, unlike today’s geographically constrained national regulators.

Property rights have become encryption The state’s conception as the legitimate guardian of private property extends back to at least philosophers Thomas Hobbes and John Locke. But cryptocurrencies challenge this view as they establish a full-fledged theory of digital property rights outside the state. A full exposition of why this is the case would get technical, but in short, in the words of computer security researcher and activist Jacob Appelbaum, “No amount of violence will ever solve a math problem,” particularly those devised for secure encryption. When property becomes a password, all our intuitions change. Soviet Premier Joseph Stalin famously asked: “How many divisions has the Pope?” But in the age of encryption, it’s not about how many divisions a state has to defend its property. It’s about how much long division it would have to do to seize yours.

International rule of law is becoming rule of code After three decades of bombings and invasions, sanctions and surveillance, the United States can no longer credibly claim to be the impartial arbiter of a rules-based international order. Obviously, any such rules are very clearly not applied to itself. Of course, China can’t claim to be a defender of a rules-based order either. Yet the goal itself is desirable—small countries would prefer some kind of order rather than being at the mercy of one power (the United States) that gives international rule of law only lip service and another power (China) that doesn’t even do that. For this, at least in the commercial realm, we believe they will increasingly turn to what we call “rule of code.” Whether Democrat or Republican, Chinese or American, the Bitcoin and Ethereum blockchains are the same for all and treat all the same. Intellectual property is already being codified on blockchain ledgers, beginning with nonfungible tokens, bringing transparency to what has been a fragmented legal process. Property rights themselves can be digitized through geographic information system (GIS) mapping and land cadastration (surveying and parceling of property), eroding the bureaucratic opacity that favors predatory governments. And rather than subject themselves to expropriation risks, investors could demand governments put up collateral codified in smart contracts that would be forfeited in default. We are still in the early days, but enforceable international law may become synonymous with decentralized smart contracts, at least in the context of international trade. And beyond trade, crypto protocols provide transnational protection for civil liberties like freedom of speech and privacy. This is not yet the entirety of what the rules-based order purports to protect, but the ability to guarantee free speech and free markets to anyone with an internet connection is a major step forward.

Power is decentralizing away from the United States and China About 75 percent of the world’s population, more than 60 percent of global GDP, and around 50 percent of all billionaires are neither Chinese nor American. Those two superpowers may well fight, but it’s not obvious if the rest of the world will want to align with either party. Indeed, with the rise of decentralized protocols, we anticipate that many states in the middle may decide to use Bitcoin, Ethereum, and other chains for China- and U.S.-resistant communication and financial transaction channels. That is, in addition to building national stacks (data and app ecosystems) for domestic transactions and communications, countries may use neutral protocols for international transactions and communications. This gives every country a choice: Rather than being forced to take sides in a new Cold War, they can update the “Non-Aligned Movement” to form an “Aligned Movement,” where they rally around their joint sovereign stakes in Web3 protocols to facilitate cross-border trade. Early signs of this are already visible with Latin American countries adopting Bitcoin. Not incidentally, such protocols will also command the respect (and investment) of many millions of Chinese and American citizens.

Put all these pieces together, and rather than a unipolar Pax Americana or a bipolar “New Cold War,” the future will be a decentralized race to the top as countries, cities, companies, and communities—physical and virtual—compete to attract talent and capital. We do not argue that states are irrelevant; rather, they will be more relevant if they embrace the arrow of history and work with the network and less relevant if they attempt rearguard actions against it. Such is the nature of great protocol politics. What does that mean for the United States? Today, the United States is experiencing a relative decline in strength across economic and military axes. Its global role is more a function of its victories in 1945 and 1991 than its capabilities in 2021. Yet precisely because it lacks the force to change this downward trajectory overnight, it has more reason to support a decentralized order, where societies and individuals freely choose to ally with high-quality “Made in America” protocols—digital rules that bind others just as they bind those in the United States or China. Reinforcing the Biden administration’s “Build Back Better” mantra, Web3 protocols could also reduce polarization and inequality by giving citizens more of a stake in the system—as is already underway with experiments in New York City, Miami, and Wyoming. The United States could also continue on its current path and try to fight China, Bitcoin, and the internet at the same time. But if it chooses that route, to paraphrase Bremmer, the unrealistic utopians wouldn’t actually be the technologists—they’d be the politicians.

Great Protocol Politics