|2017/10/13 06:47, Breaux:|| |
|Listened to some podcast recently on bitcoin which helped frame my view on the future of cryptocurrencies and why cryptocurrencies have a future but maybe not Bitcoin. Goes something like this.
First-generation cryptocurrencies like Bitcoin were designed to prevent governments from meddling in people's finances and affairs. My bet is that governments are never going to let such currencies come into serious play with the state-backed currency systems, because they are effectively designed to to prevent mechanisms that allow redistribution of wealth (taxes and inflation).
CRYPTOCURRENCIES however (not Bitcoin), are likely to play a very important role in the future monetary system of the world. Remember that historically we have changed monetary system every 30-40 years or so. The current monetary system (USD as the world's reserve currency) has been in play for over 70 years now, ever since Bretton Woods in 1944. So both from a cyclical/historic perspective, we are definitely due for a change. Also looking at fundamentals, we are due for a change. The US was selected as the world's reserve currency because it had the strongest credit in the wake of WW2, which was fought
Being the world's reserve currency basically comes with an exorbitant privilege in that the issuer of that currency can get into debt for free; the usual result of borrowing excessively for other countries would be that treasury yields increase and cost of borrowing increase. But this is not the case for the US atm, since there is so much demand for USD as the reserve currency. So obviously other countries like Russia (read anything by Sergey Glasyev) and China wants to strip the US of this unfair advantage by pushing the trend of dedolarization to facilitate a shift in world reserve currency. Arguably, it is unfair because US may no longer be the world's strongest credit (national debt of 20 trillion dollars). Already in the late 1960s the strength of the US credit was questionable, and as a result Nixon had to slam the convertibility to gold, establishing a pure fiat system. The only reason it was kept was because Kissinger struck a deal with the saudies a few years later, perpetuating the USD as the reserve currency through the petrodollar system.
But why is change imminent NOW? Well let's see, the US is no longer the main importer of oil. The Chinese (the world's largest importer of oil) are putting significant pressue onto the Saudis to trade in other currencies. The Saudi king recently met with Putin (an event unimaginable until recently). China is about to issue a future oil contract in Yuan backed by gold, to allow oil traders to bypass the dollar. There is a clear trend of dedolarization, but at this stage there is no clear alternative reserve currency.
Cryptocurrency may be the answer in the end. China and Russia are both working on government-sponsored cryptocurrencies. The PBOC are actively advertising for hiring crypto engineers for creating a digital version of the renminbi. Russian state-sponsored crypto-currency is also on the roll, Putin met with Ethereum founder to discuss this recently. The long and the short of it is that crypto may eventually take over as the global transaction currency, and subsequently the denomination for central bank reserve assets, making it the world reserve currency. The question then becomes, what will a state-backed currency look like?
Government are likely to use the blockchain technology, but redeploy this in a completely different way, such that they will be able to tax you, they will have full transparency over your transactions, they will be able to increase the money supply by the push of a button. In the hands of governments, it would probably become the utter antithesis to what first-generation cryptocurrencies were designed to do. It will become impossible to conceal any wealth within this system.
Who issues and controls this new global cryptocurrency will be the space race of the 21st century, probably between the US, China and Russia.