A feeling of uncertainty has eclipsed global affairs and individuals are developing an increased reliance on the thoughts of those bold enough to attempt comprehension.
I’ve spent some time reading and thinking through various concepts and believe we are witnessing an inflection point of global trust.
Previously, in the world’s most developed countries, money was tied to a positive value: the value of a well-defined quantity of a good of well-defined quality.
Societies developed technologies and social structures to reduce the need for trust through reputations, security and money.
When you provide an individual a good or service, rather than trusting that they will return it to you in the future, they can immediately trade money to you, eliminating the need to trust.
The ability to freeze the reserve assets of another country removed a foreign government’s right to either repay its debts or spend those assets.
government issues debt, and demand from domestic and foreign buyers of it isn’t strong enough, the Federal Reserve prints money to purchase it in the open market and generate demand.
Will foreign governments attempt to de-dollarize? This question is complex as it not only requires an understanding of the global banking and payment systems but also maintains a geopolitical background.
Since its establishment, the dollar has served the functions of money best at an international level because it can be easily traded in global markets which maintains capital controls on foreign exchange markets and frequently intervenes to manipulate its price.
Three percent of the decline is accounted for in the euro, 2% from the pound, 2% from the renminbi and the remaining 4% from other currencies.
More than half of the 11 percentage point decline has come from China and other economies began gradually revealing their FX reserves to the IMF.
Foreign debt issuance in USD has also gradually declined by ~9% since 2000, while the euro has gained ~10%.
This is important because it is these emerging markets that stand to lose the most from international payments and for this reason alternative systems are attractive to them.
If we look at the trend in composition of foreign payments it’s evident that the dollar’s share of invoicing is materially greater than its share of exports, illuminating its outsized role of invoicing in proportion to trade.
What’s important is that the volume of all major global reserve currencies have declined slightly while the volume of “other” smaller world currencies has increased from 15% to 22% in proportion.
withdraws its military power globally, which backs the dollar’s functions as a medium of exchange and unit of account, it decreases demand for its currency to serve these functions.
I believe history will look back on this event as the initial catalyst of change towards a new era of global monetary order.
Effectively, ~$300 billion of Russia’s ~$640 billion in foreign exchange reserves were “frozen” from the SWIFT international payments system.
This doesn’t mean that these countries will begin cooperating as they are all subject to constraints under an international spiderweb of trade and financial relationships.
Just because China wants to partner with Russia and achieve “world domination” does not mean that they will do so since they are subject to constraints.
However, as much as countries would prefer to opt out of this dollar dependency, they are constrained in doing so as well.
What if the exchanges can’t cover it? Then we have a major credit contraction in the commodity markets on our hands as people start pulling money out of the system.
What is unique to this situation is that the “subprime” collateral of Russian commodities is what Western central banks would need to step in and buy — but they can’t because their governments are the ones who prevented buying it in the first place.
If so, China would strengthen its balance sheet with commodities which would strengthen its monetary position as a store of value, all else equal.
However, the renminbi is only 2.4% of global reserves and has a long way to go towards international monetary dominance.
What’s more likely is that the system will continue splitting and we’ll have multiple monetary systems emerge around the globe as countries attempt to de-dollarize — referred to as a multipolar system.
Russia’s change of heart can be attributed to the desire for commodity money as well as the disintermediated payment infrastructure that Bitcoin can be transferred upon — leading to the third realization.
Donations in support of Ukraine via crypto assets demonstrated to the world the rapidness and efficiency of transferring value via just an internet connection, without relying on financial institutions.
Subsequently, a Russian official stated that it will consider accepting bitcoin, which I believe is because they are aware that bitcoin is the only digital asset that can be used in a purely trustless manner.
They will become more avoidant of fiat money , as it is easily frozen, and they are realizing the disintermediated nature of digital payment infrastructure.
While I don’t expect that the dollar will lose primacy anytime soon, its creditworthiness and military backing is being called into question.
The countries most interested and least restrained in adopting digital assets will be among the fragmented developing world as they stand to gain the most for the least amount of political cost.
However, bitcoin’s trustless nature will not be overlooked, and countries will consider it as a reserve despite its tradeoffs with gold, to be discussed below.
Since 2000, gold as a percentage of total reserves has been declining for advanced economies and growing for China, Russia and the other smaller economies.
The chart below shows that non-advanced economies have increased their total reserves by 9.4x and gold reserves by 10x, while advanced economies have increased total reserves by only 4x.
The growth and size of smaller economy reserves is important when considering bitcoin adoption among them as a reserve asset.
Storing bitcoin doesn’t require trusted intermediaries and thus can be stored without the risk of appropriation — a risk for fiat assets.
With these considerations in mind, I believe the smaller emerging economies that are largely removed from political influence will spearhead the adoption of bitcoin as a reserve asset gradually.
There are many reasons that countries would want to prevent bitcoin adoption, but on net the positive incentives of its adoption are strong enough to outweigh the negative.
Trust is diminishing among global reputations as countries implement economic and geopolitical warfare, causing a reduction in globalization and shift towards a multipolar monetary system.
Enabling a permissionless money with the strongest monetary properties will spawn an era of personal freedom and wealth creation for individuals, instead of the incumbent institutions.