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Reserve Currency Bitcoin?

Reserve Currency Bitcoin?

Sources: The Guardian Bloomberg FT Wikipedia The Balance Investopedia Coin Telegraph The Money Project

The current fiat monetary and financial systems are broken. If anyone is in any doubt about that, a look at the economic chain reaction triggered on 9th Aug 2007, will quickly disabuse any ideas of comfort and safety.

Recent comments by Mark Carney, current Governor of the Bank of England at a meeting of Central Bankers in Jackson Hole, Wyoming (23/08/19) is the first admission by a significant member of the global monetary establishment that things can not continue as they have and merely putting a band-aid on an issue that requires stitches will only result in more uncertainty.

Carney’s proposal is a total revamp of the global economic order. A move away from sovereign based currencies like to the US dollar, Euro, Pound and Renmimbi (Yuan) to a shared global electronic synthetic hegemonic currency (SHC) that would work through a network of central banks – in short a centrally managed crypto-currency. The concept is based on the recently proposed Facebook currency called Libra.

Question: Which countries qualify and on what criteria to be in the SHC club, does this not leave developing countries exposed?

Fundamental to Carney’s conception of the SHC is the removal of the US dollar as the reserve currency of the world, a position that it has held since 1919 and was ratified at Bretton Woods in 1944. That position was further strengthed by US, Saudi agreements made in 1945 and 1979 that created the ubiquitous petrodollar and its recycling revenue generators.

With US debt increasing and China having overtaken the US as the biggest manufacturer in the world, the position of the US dollar as the world’s reserve currency is under serious threat from the Yuan. The last 100 years of the US Dollar as the world’s reserve currency has shown that in the wider sphere of geo-political economics it is possible to weaponise a global reserve currency.

Question: Would the West agree to be economically dictated to by the Chinese government?

Of additional concern is the acknowledgement in economic circles that the US dollar has lost over 90% of its real value in the last 100 years, as such should it really be held in such high regard? The recent antics by President Trump have driven this point home to many governments around the world as they have watched the erratic behaviour of the US dollar on world markets in response to the equally erratic pronouncements from the White House.

One conclusion that can be drawn from Mr Carney’s proposition, to introduce an SHC, is that it would be a slight of hand that would best serve the West as a means of minimising the influence of the Chinese Central Committee on Western financial and economic policy. The dominance of the Chinese in global economics is viewed with badly concealed trepidation by Western governments as the Chinese do not always play by the same rules or have the same outlook.

Question: Would the Chinese government agree to be neutered for greater economic stability?

A hegemonic currency would have a number of challenges that it would have to overcome for it to become an excepted form of tender. Here are some of the reasons an electronic currency designed and built for and by the world’s largest Central Banks would struggle to get traction with the global (predominantly Western) constituency:

  1. The credit crunch of 2008 saw the erosion of TRUST in many Central Banks in the developed world. One of the core function of a central bank is to supervise and regulate banks and financial institutions – this did not happen, rules were relaxed, ignored and in some cases bent, broken or thrown away – the result was the sub-prime debacle.
  2. “What the Bank of England does in QUANTITATIVE EASING (QE) is it prints money to buy government debt, … So the Quantitative Easing has enabled governments, this government, to run a big budget deficit without killing the economy because the Bank of England has financed it.” (Stephen Hester, chief executive officer of the RBS Group 2013). Since the Financial Crisis, a number leading Central Banks including the UK’s Bank of England and the US Federal Reserve have used QE as a way of resolving some of the fiscal and monetary challenges they have faced in trying to stabilise their economies. The flip-side of this is that it has reduced the buying power of those currencies.
  3. Once the Financial Crisis was in full effect those same Central Banks in cahoots with their respective governments then proceeded to use PUBLIC FUNDS to provide:
  • liquidity support;
  • interbank lending guarantees;
  • and recapitalisation of distressed banks.

This resulted in a further loss of trust by the public as it dawned on them that the brunt of these costs would be paid for through AUSTERITY and taxation on them (the public).

The days of sovereign siloed currencies are numbered. However there is a endemic lack of trust and transparency in Central Banks as they are all directly or indirectly managed or manipulated by political masters and the creation of a SHC is not panacea to this condition

Question: How independent from sovereign politics would the body that controls the SHC really be?

Using the European Central Bank (ECB) and Eurozone as a yardstick there are significant challenges to consider on the issue of INDEPENDENCE:

  • The eurozone currently suffers from deep divisions between member states over the appropriate level of centralisation. There is no reason to expect that tribal politics will not play a part in any SHC, as board members may still have to answer to the politicians in their home countries who will have their own agenda’s.
  • The prospect of anti-globalisation or nationalist movements pushing to leave the SHC at some point in the future could send markets into a tailspin, requiring swift reaction from a national Central Bank or SHC authority. In 2019 Europe is experiencing the discord created by the UK vote to leave even though the UK did not adopt the Euro, there are enough financial and economic ties for it to have a significant impact on both sides of the relationship.
  • Financial markets could easily be rattled if sovereign states, covertly or overtly apply pressure over monetary policy decisions, similar to the concerns over Donald Trump’s very public disagreement with the chair of the US Federal Reserves over what policies to apply and whether to continue an unecessary trade war.

Many of the points mentioned above would not be an issue if a crypto currency such as Bitcoin (BTC) were to be adopted as the globalcoin. It has no centralised management and control and therefore political pressure would not have anywhere to focus.

Mr Carney in his speech about the current fiat system of currency did not directly address the concept of fractional reserve banking (FRB). Would this disappear with the appearance of the SHC? Technically it is possbile to build the FRB capability into an electronic currency, this begs the question, why do this when FRB is one of the pillars of the cyclical inflationary spikes and dips that plague the existing fiat system? It is difficult to see how electronic money such as BTC would allow fractional reserve banking trades to occur on a publically accessible blockchain ledger with a known maximum size of 21 million whole units.

A bitcoin can be divided down to 8 decimal places. Therefore, 0.00000001 BTC is the smallest amount that can be handled in a transaction. What is not possible is to create more than the 21 million coin limit.

The origins of BTC mean that it does not have a political or sovereign master and therefore it can not be influenced or weaponised, the way the US dollar has been by the the US government. Therefore illiciting a more level playing field in the geo-political landscape. Developing countries which produce most of world’s raw materials but rarely realise the true value of their efforts would able to negotiate in parity with those who require the raw materials.

BTC has some features that a central bank or goverment with an agenda weould find hard to swallow but would ultimately be of more interest and benefit to the final consumer:

  • So long as one has access to the internet, in any format, (mobile, desktop or portable) one can send and receive bitcoin and it does not recognise IP address or borders as part of the transaction process. In a nutshell, BTC is borderless. A Central Bank created SHC would more than likely not have this capability in order to allow it to be weaponised.
  • Since its inception no one has been able to find or create a backdoor into BTC that changes the final volume of coin that will be created; the speed at which it is created and the amounts paid out for mining. Further, the blockchain ledger is designed such that any external introduction of fraudulent transactions will be quickly identified and ignored by the system.

Question: Would a government or Central Bank allow for the creation and use of an electronic system to which they do not have a backdoor?

  • Sanction and censure is not possible when using BTC as all users are anonymous on the bitcoin blockchain. From a political persective this is a significant challenge, how does one nation state impose economic sanctions on another nation state or individual?
  • Though anonymous, BTC is transparent allowing anyone to look up the contents of the blockchain and see the transactions in progress (confirmed and unconfirmed). Would a central banking authority put ALL transactions out in the public domain even if they are anonymised?

In conclusion it is clear that the govenors of the largest Central Banks know that something has to done as the situation is unsustainable and for the financial security of their sovereign states, political masters and own positions it would be prudent for them to try and build a solution themselves as opposed to being runover by circumstance.

Bitcoin offers a more trust worthy framework for a currency, that can not be interfered with but it is not perfect, it has its own challenges, but trust is not one of them, because transparency is built into the system. Which government would be willing to surrender most of its fiscal levers to the system? Despite all the positives in using Bitcoin it does have some weaknesses in relation to flexibility but the system was built with trust and transparency as its foundation.

A synthetic hegemonic currency means some are in the club and some are outside (mostly developing countries). There are many fundamental questions that would need to be addressed first. What level of transparency would be available to prevent this new trading tool from being designed on the existing archaic frameworks and subsequently being weaponised for the benefit of those who created it. Mr Carney may have opened up a real pandora’s box by broaching this subject. The challenge is not in building the technology for such a system, it is in unpicking 11 centuries of power and control from governments and Central Banks.


Previously published LinkedIn on August 28, 2019