How Bitcoin Can Help Nations With Lots of Foreign Currency Denominated Obligations

Turkey’s currency is having a hard time on the foreign exchange market.

Turkey’s government alleges the nation’s currency is coming under attack by foreign foes.

We all know that international securities markets aren’t free from manipulation. Indeed manipulation of these markets is a key measure of control that the status quo powers have at their disposal.

Take a look at the offshore Chinese yuan as an example. The fall of the offshore Yuan was widely attributed to capital flight via the cryptocurrency ‘Bitcoin’ in the international media.

Specifically it was alleged that individuals within the PRC were remitting capital abroad via bitcoin and this was draining foreign currency from China thus causing the value of the offshore Yuan to fall relative to the USD.

However, upon examination one discovers that bitcoin remittances made within China don’t have any effect on the quantity of foreign currency holdings, as bitcoin remittances don’t require the exchange of any foreign currency like a traditional forex market transaction would.

When individuals within a jurisdiction purchase bitcoin, they exchange local currency for bitcoin, and if they move those bitcoins to a foreign jurisdiction and then exchange them for the local currency of that jurisdiction, no forex market exchange takes place. Both of these transactions are considered local to the jurisdiction where they're consummated.

So taking these facts into account we can safely say that bitcoin remittances have no direct effect on the foreign currency holdings of China (or any other jurisdiction) and thus shouldn’t have any effect on the forex market value of that jurisdiction’s currency.

However, the forex market, like all other securities markets, is subject to a great deal of speculation. Forex market speculation goes beyond the plain vanilla currency exchanges made by banks and other large financial institutions. Many forex market speculators trade currencies purely on sentiment/bias towards the jurisdiction issuing a particular currency. Pushing the value of that currency up or down relative to the value of an offsetting currency, based not on the fundamentals of the currency flow, but on the sentiment towards the issuing jurisdiction.

There’s isn’t much one can do about the presence of forex market speculation, one simply has to learn to live with it. However, bitcoin remittance can provide some relief from the effects of this forex market speculation. If forex market speculators are successful in forcing down the price of a particular currency relative to another, market participants can circumvent the effect by purchasing bitcoin in their local currency at the local market rate and then remitting it to a foreign market, and obtaining the local bitcoin market rate in that jurisdiction. The transaction bypasses the forex market price as it bypasses the forex market altogether.

We can also come to the conclusion that jurisdictions wishing to preserve their holdings of foreign currency should encourage their citizens to make currency exchanges via bitcoin instead of the forex market.

This is what China, Turkey, and emerging market jurisdictions with large quantities of foreign currency denominated obligations should do. In the particular case of China, this measure would allow China to both preserve social stability by giving its citizens, who wish remit value abroad, the piece of mind of being able to do so, and preserve the country’s foreign currency holdings for the servicing of foreign currency denominated obligations.

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