Much like the cruel joke Charles de Gaulle reportedly cracked about Brazil – that it’s “the country of the future and always will be” – predictions of an end to the dollar-based international monetary system seem to belong to a future that will never arrive.

Yet that future is coming, faster than all the prior failed forecasts of the end of dollar hegemony would have you think. In contributing to that shift, Brazil may have the last laugh.

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The catalyst can be found in central bank digital currencies (CBDCs), a model for digital fiat money that was, ironically, spurred by governments’ reaction to the 2008 invention of the decidedly anti-fiat Bitcoin protocol. Bitcoin fanatics tend to pooh-pooh CBDCs as centralized tools for government manipulation that local populations will recoil from. In dismissing them, they overlook the massive cross-border shifts these new tools will foster at the macro level.

As key export economies such as Brazil embrace CBDC-based direct settlement with their trading partners, it will spur a trend of de-dollarization over the next decade. The ramifications for U.S. capital markets, for the global economy, and for geopolitical power dynamics are profound.

Brazil’s central bank is among more than a hundred experimenting with CBDCs. Others that matter for this discussion include the United Arab Emirates, Russia, Singapore and China, which is streets ahead in rolling out its electronic currency, the e-CNY. China, of course, has made no secret of its desire to reduce its dependency on dollars.

Those five economies account for around 25% of global output, but it’s their outsized roles in world trade – as exporters of oil (UAE’s Abu Dhabi), foodstuffs (Brazil), natural gas (Russia) and consumer goods (China) and as a finance and shipping entrepot (Singapore)  – that amplifies the international impact of their respective currency strategies.

Things will get really interesting once such countries’ central banks use digital currencies in direct settlement arrangements with each other rather than going through the dollar, which is currently used as an intermediating currency in 90% of all trade finance. There are signs this is moving forward – from Singapore’s DBS Bank recent move allowing direct payments in e-CNY to multilateral institutions such as the Bank of International Settlements, the World Bank and the International Monetary Fund encouraging member countries to collaborate on cross-border CBDC design. So, buckle up.

People tend to view CBDCs through a retail lens, seeing them as new digital payment units that citizens would use in daily purchases. That somewhat overhyped idea has fueled concerns about state surveillance of people’s spending – to such an extent that opposition to CBDCs is now a campaign position of U.S. presidential candidates, including Republican hopeful Florida Governor Ron DeSantis and Democrat challenger to President Biden Robert F. Kennedy Jr.

While those privacy concerns are valid – see my critique of the European Commission’s CBDC plans last week – they’re a sideshow. The far bigger issue lies in wholesale, cross-border transactions.

I’ve been arguing for some time that protocol-based interoperability for countries to directly exchange digital fiat currencies would have a dramatic impact on the international monetary system.

By cryptographically locking an exchange rate forward-contracts into a decentralized, blockchain-based escrow structure could protect an exporter and an importer from currency volatility over the timeframe of their trade deal without either party having to trust the other, or anyone else, to hold the funds. Voilà, no need for the dollar to sit in the middle.

Under this system, a Brazilian farmer could agree to provide a Chinese hoggery with soymeal feed for its pigs at a real-to-renminbi exchange rate fixed at signing, knowing that a smart contract would automatically deliver those funds upon arrival of the shipment in Shanghai. With the right oracles in place, all this would happen peer-to-peer without either side having to trust the other’s promise to deliver the funds or the goods.

As such, they could eschew the grossly inefficient current system in which a U.S.-regulated correspondent bank typically acts as the trusted third party in the deal, first exchanging the importer’s renminbi into dollars and then converting them into reals for the Brazilian exporter. If such arrangements proliferated, I have argued, it would reduce global trade-related demand for dollars and, by extension, diminish investment in dollar reserve assets such as U.S. government bonds.

Now, after listening to influential economist Zoltan Pozsar on the Odd Lots podcast with Bloomberg’s Joe Weisenthal and Tracy Alloway, I see that it will likely be the collaborating efforts of central banks, rather than direct importer-exporter agreements, that will forge this path toward disintermediated digital settlement.

Pozsar sees CBDC-wielding central banks adopting new roles as clearing agents for their country’s exporting and importing firms and then using CBDCs to settle directly with their foreign counterparts. In this way, they would displace the all-powerful dollar-based correspondent banks of Wall Street, such as J.P. Morgan and Citibank. The upshot is that countries won’t need as many dollars.

Pozsar sees the trend driven by mid-tier trade-heavy economies, those that play an outsize role in the demand and supply of dollars worldwide. Net exporting countries that run trade surpluses will accumulate fewer dollars and so will supply less greenbacks to global foreign exchange markets. And importers that run trade deficits will have less demand for the dollars they previously needed to pay for things.

It’s all part of Pozsar’s “Bretton Woods III” vision, where the dollar ultimately loses its hegemonic status over the next decade. Importantly, he sees a different outcome from that of the British pound’s loss of reserve status in the early 20th century, when the U.S. dollar simply supplanted it. Instead, he predicts a multi-currency world where no one currency is dominant, a result made possible because of CBDC clearing mechanisms, which negate the need for reserve currency intermediation. Negotiating counterparts will need to agree on which of their two currencies to denominate their trade deal in, but they won’t have to default to the dollar, or some other universal standard, for actual settlement.

So China is not destined, as some have argued, to become the world’s reserve currency leader. Nonetheless, it will likely see its global influence grow as more of its trade contracts are listed in renminbi. The trend is already underway, with Russia, Brazil, Argentia, the United Arab Emirates, Egypt and other countries all agreeing to denominate trade with China in its currency. Even U.S. Treasury Secretary Janet Yellen has said a gradual decline in worldwide dollar reserves is to be expected.

Depending on how fast the trend occurs, it will have major implications for the U.S. The debt racked up by U.S. consumers, companies and government entities is in part sustained by the ongoing demand for dollar assets by foreign entities. The inflows prop up U.S. bonds, which in turn depresses their yields and, by extension, keeps broader U.S. interest rates low. Americans’ mortgages are affordable because of foreign demand for dollars. If that demand drops off, the cost of capital in the U.S. will rise – likely significantly.

How should the U.S. respond?

I see this is an “if you can’t fight them, join them” moment. There’s no getting around Wall Street banks’ gradual loss of intermediary status, which will mean Washington can no longer use those institutions as agents for surveilling the world’s transactions. The U.S. should accept that reality and consider how to leverage the potentially fleeting advantage it still enjoys as the issuer of a currency desired the world over. It should lean into the “soft power” aspects of the dollar’s dominance – the open, rule-of-law values that underpin its value – and give up on the “hard power” elements of gatekeeping and control.

The soft-power approach works because it reinforces the diminished but still widely held impression of the U.S. as an open, advanced economy and it gives the U.S. a chance to lead monetary innovation for the benefit of users around the world.

That path forward is the opposite of China’s “panopticon” centralized digital fiat currency. There’s no compelling reason for the U.S. to develop a retail CBDC. Rather, official digital dollars should be reserved for inter-central bank cross-border settlement while domestic-use digital money should be opened up to private players using decentralized models with crypto technology. That’s where the real innovative edge will be found.

Sadly, as readers of CoinDesk will know, the U.S. government’s current agenda seems very far from that crypto-friendly approach.

When watching Washington policymaking, it’s worth remembering that governments, like all human organizations, are made up of, well, humans – complicated creatures whose emotions often undermine their capacity for rational decision-making.

Last week, I warned of a dangerous politicization trend in U.S. crypto policy following a barrage of regulatory enforcement actions taken against this industry. I remain concerned about that trend but my view is now slightly more nuanced thanks to the insights of two people with very good D.C. connections. They explained how emotions – specifically anger and embarrassment – played a huge role in driving those policy actions.

It reminded me of the importance of clear, inviolable rules of governance, whether they’re baked into democratic institutions such as the U.S. Constitution, or forged into consensus mechanisms used by open-source software communities, like those attached to blockchain protocols.

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Among a string of “Thanks Sam” moments these past five months, this one takes the cake. You can argue that the crackdown against Kraken, Coinbase, Paxos, Binance and others was driven significantly by a desire to punish Sam Bankman-Fried, the erstwhile founder of FTX, whose mind-blowingly rapid collapse in November sent shockwaves through the crypto industry.

This is how one of my sources described the mindset of Biden Administration officials, and of lawmakers from both political parties: “You can’t come into their house, slosh that kind of money around, leave politicians with egg on their faces, and not expect to pay a huge price.” He was referring to the fact that before the FTX meltdown, politicians — mostly Democrats but also some Republicans — had been beneficiaries of more than $74 million in political donations from FTX and had forged connections with Bankman-Fried, who’d wooed progressives with his “effective altruism” commitments. (A CoinDesk investigation found that one third of Congress took money from SBF or his associates.)

Virtually no one in this industry would try to diminish Bankman-Fried’s extensive wrongdoings and most now want tighter regulation. (In fact, the biggest frustration is that SBF’s actions have set back the chance of a clear regulatory framework, leaving agencies like the Securities and Exchange Commission to continue being a law unto themselves.) What’s so galling is the capricious and utterly disproportionate reaction generated by that malfeasance.

Forget regulation-by-enforcement; it seems we’ve entered a newly nutty standard of regulation-by-retribution.

Set aside that millions of investors, employees and developers with a stake in the crypto industry are now paying for the sins of a few fraudsters whose behavior they never knew of, let alone condoned. The biggest issue is that because there are very few physical or geographical reasons why blockchain developers would favor one country over another, the U.S. is about to lose all capacity to shape this inherently borderless technology’s direction. No other developed economy is taking as hostile a stance toward this industry.

There’s the growing view that digital asset and blockchain innovation — now, in the age of artificial intelligence, more important than ever — will depart the U.S. for friendlier shores. And there’s the especially counterproductive concept that if the U.S. wanted to keep the tech away from bad guys in rogue states, it is making that more, not less, likely.

The good news is that this vengeful moment is destined to subside — as most emotion-driven overreactions eventually do. Tempers will surely give way to a more grown-up approach to policy. Still, the damage already done to the United States’ prospects to attract crypto investment, entrepreneurship and innovation could be profound. U.S. industry leaders of all stripes have been warning of an exodus of crypto businesses.

You see, whether this a “war against crypto” or just a deliberate bruising, crypto business people are seeing the slew of criminal and civil charges as a message that, in the absence of clear legislative guidance defining what activity is or isn’t within bounds, it’s now too risky to keep operating in the U.S.

That message was brought home in two ways. The regulatory actions seemed way too well-sequenced to be coincidental. Then the White House released a scathing report on the industry at the very same moment, one that reversed the open-minded executive order it produced a year ago. It didn’t help, either, that Senator Elizabeth Warren (D-Mass.), a figurehead of the Democratic Party’s progressive wing, launched a political campaign that celebrated a Politico headline stating that she’s forming an “anti-crypto army.”

“D.C. is Veep. It’s not House of Cards.”

So said my Money Reimagined co-host, Sheila Warren, who is also CEO of the Crypto Council for Innovation and my second source for this story (the other will remain anonymous), during this week’s podcast recording.

On the one hand, it’s comforting to know that we’re not really at the mercy of some cynical uber-conspiracy orchestrated by the likes of Frank Underwood, the political villain played by Kevin Spacey in House of Cards.

But on the other hand, it’s sad to know that human fallibility leaves our governing institutions prone to absurd moments like these, as if we’re permanently subject to the self-absorbed decision-making of people like Vice President Selina Meyer, Julia Louis-Dreyfus’s comically flawed lead character in Veep.

These human failures, both evil and farcical, led French philosopher Montesquieu to conceive of the “separation of powers” doctrine, a principle of governance designed to protect society’s interests from the mistakes or corruption of its leaders. Those ideas were then enshrined in the U.S. Constitution and helped shape the Westminster System, with its three, independent branches of government.

They also inform the blockchain idea — initially identified in the Bitcoin whitepaper — that we need a system for managing money, assets and information that’s not beholden to “trusted third party” middlemen. Having to trust intermediaries and representatives will always leave us vulnerable to the problem that they are run by humans, not math.

I’m no radical advocate of replacing the nation-state with some kind of digital “network state,” but it’s interesting to think how these new technologies offer people the option to exit into alternative, decentralized economic systems and how, indirectly, this could put pressure on our politicians to lift their game.

It’s worrying that the “war on crypto” puts the U.S. and its model of market democracy at greater risk than ever of losing economic and technological leadership. But we can at least take heart that the technology itself might impose a self-correcting force on the political system to avoid the worst outcomes.