Reserve assets can be currencies or any other asset, such as gold or silver, that can be used for international payments, investments, and other aspects of the global economy.
However, last week Credit Suisse – the Swiss global investment bank – released a report predicting an imminent and drastic change in the global monetary system. He said that given soaring inflation in the west and geopolitical tensions in the east (the Ukraine-Russia war), a “new monetary order” could emerge in which Bitcoin could be a beneficiary. unlikely.
He concluded his note with a comment on bitcoin, which he believes will benefit “if it still exists” coming out of the crisis, hinting at the possibility of bitcoin becoming the next global reserve.
How reserve assets and their history work:
Reserve assets are commodities, currencies, or other capital held by institutions and countries as a hedge against global market fluctuations caused by external factors. They play an essential role as a cash reserve in the balance sheets of many entities. They are meant to be an independent store of value that is unaffected by market volatility.
In the 19th century and earlier, precious metals like gold and silver were used as universal commodities that people could use to effectively store the value of their labor. But due to the limitation of not being able to use them daily, paper currencies were used as a layer of abstraction backed by some of the gold stored in a safe place.
At the end of World War II, leaders from 44 countries came together to sign the Bretton Wood Agreement. Under this agreement, the value of the US dollar would be pegged to gold, and other currencies would, in turn, be pegged to the dollar. However, this system began to break down over time and was finally abandoned in 1971 when President Nixon removed the dollar from gold, as mentioned earlier.
Since then, the international community has used a simple fiat currency model. Here, the currency is backed only by faith in the government itself and its value is determined by the market forces of supply and demand.
The problem with the current system:
This system has its fair share of problems. For example, countries that wish to use their fiat currency as a global reserve asset must run an ongoing trade deficit to supply enough to meet global demand.
Moreover, to meet this demand, the central banks of the world’s major economic powers can easily print fiat currency from scratch. Over time, this has led to the injection of over $10 trillion into the system. And in the case of the United States, this could be one of the main reasons why inflation is so high.
How can bitcoin as a reserve currency solve the problems we face today?
Today, institutions face many threats to the value of their stored reserve assets, including inflation, weakening purchasing power, international competition, and more. Entities seek alternate reserve assets that are rare and cannot be affected by third-party forces. Cryptocurrency like bitcoin holds great promise because it is decentralized.
Bitcoin is a decentralized transactional data storage system. Data storage is done on blocks on a public ledger/database. This means that there is no centralized authority controlling the changes and actions that occur in the database.
Instead, transactional data in the bitcoin blockchain is verified by a network of peers who all hold a copy of the database/ledger. This means that any modification or action in the database must be verified and approved by all nodes in the network. This makes the bitcoin blockchain structure secure and immutable. Bitcoin as a reserve asset will remove the element of third parties controlling the structure, essentially removing their influence over the currency itself.
Moreover, when bitcoin was launched by its mysterious creator, Satoshi Nakamoto, it incorporated a set limit of bitcoin tokens that could be introduced into the blockchain. This limit has been set at 21 million tokens. A limited supply makes bitcoin a rare asset and an excellent hedge against inflation.
Removing central intermediaries in the transaction process also speeds up the system. Additionally, with only wallet addresses attached to a person participating in transactions, bitcoin also offers a better level of anonymity than fiat currencies.
In his memo, Zoltan wrote that “money” will never be the same after the war in Ukraine, and bitcoin could be a beneficiary of that. To what extent this is true, only time will tell.
(Edited by : Priyanka Deshpande)
First post: STI