SWIFT, Financial Censorship, The Bitcoin Standard (II)

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Coinmonks

9 min readMar 3, 2022

(You can read the first part of the article here)

The harshest sanctions ever imposed on Russia have so far failed to deter or briefly halt Russia’s military aggression. The US and its allies, frequently resorting to sanctions amid geopolitical conflicts, are fiercely criticized for the weaponized act threatening the dollar standard — as countries quicken their paces of settling international transactions through alternative currencies.

Cryptocurrency, undoubtedly, caught attention again for its potential to disarm the enforcement of sanctions. Some attributed the most recent bitcoin rally to Russian investors panicking over the collapse of ruble and thus ditching the devaluing currency for bitcoin. They wanted to preserve their purchasing power by holding assets that are both safe and sanctions-resistant. Reportedly, the US Treasury Department is targeting sanctioned entities and individuals who may go after digital assets like Bitcoin as a means of sanction evasions.

Simultaneously, the Ukrainian government has received $35 millions worth of donations in cryptocurrencies, including Dogecoin, the king among all meme coins, and many more. The speediness, security, and privacy of crypto transactions prevail over bank transfers that usually take days to go through and are implicated with burdensome bureaucratic processes. To a country like Ukraine under the threat of being annexed by a foreign power, days could be a matter of life and death.

The prominent features of cryptocurrency are strongly demonstrated in the above scenarios. Cryptocurrencies have shown tremendous strengths as an asset class, not necessarily challenging, but complementing the dollar standard implemented since the Nixon government released the rein on money printing by abandoning the gold standard in 1971.

Among all the cryptocurrencies, bitcoin is still the strongest and most promising. The Bitcoin Standard could be the foundation of a new monetary system that protects the rights of transactional freedom and financial privacy, a future that may not be revolutionary but definitely revisioning to what we have at the moment.

Bitcoin as a Commodity

Bitcoin is originally designed to facilitates peer-to-peer transactions used for bypassing financial censorship and reclaim financial dignity for individuals. Its built-in proof-of-work mechanism, with nodes stored and processed in a network of computers and no central “servers” recording transactional information, guarantees an unprecedented level of decentralization.

The birth of bitcoin is, to a high degree, a reactionary response to the 2008 financial crisis, a manifested distrust to the corporate banking system and the establishment responsible for monetary and fiscal policies

But why Bitcoin? Why not USDC, ETH, or Dogecoin?

First, bitcoin is considered as a commodity like gold and oil by the U.S. Commodity Futures Trading Commission (CFTC), because 1) there is no a common enterprise that controls Bitcoin and 2) it has a limited cap of 21 millions of coins ever available to be mined.

This classification, however, may not be applicable to other cryptocurrencies, like ETH, the second largest cryptocurrency by market cap. Ethereum’s transition to the proof-of-stake mechanism may render it as a security, due to its staking mechanism that could produce unlimited numbers of ETH and has a requirement on transaction validators to be holding at least 32 ETH.

That’s what makes Bitcoin special as a store of value, as opposed to other cryptocurrencies likely to be regulated as securities. Deflationary, limited in supply, with the programmed halving that decreases half of its mining rate every four years, bitcoin is by nature a scarce asset unlike the majority of cryptocurrencies circulating in the market.

In comparison, crypto businesses issuing stocks-like tokens to raise capitals and grant investors access to profits generated by the projects are centralized entities similar to listed corporations. Holding digital tokens, in such a scenario, is like stacking shares of a company — with the anticipation that the tokens will become more valuable in the future. In this way, fractionalized ownerships are fully capitalized through coordinated tokenomics.

This distinction is important because sales of securities are closely regulated by the U.S. and other national governments, whereas Bitcoin will be likely to be regulated as a commodity.

Speculative or Risk-Averse

Bitcoin is designed to be truly decentralized, since it doesn’t produce a return from a common enterprise, nor anyone is able to control or destroy the bitcoin network (I’ll explain that later). Though championed as “digital gold” by influencers, bitcoin is still in a nebulous state, fluctuating in between as a speculative asset like growth stocks that could lose 50% of its value within weeks and as a risk-averse asset that tends to soar in a time of uncertainty.

As the economic impacts of the Ukrainian crisis unfold and the spillover effect is expected to land on other regions, bitcoin price has rallied along with other commodities-like currencies. Bitcoin has gained more than 20% within seven days as oil price continues to spike through the ceiling set back in 2011, and gold is also entering the price exploration zone nearing $2000 per ounce.

But, when looking at the gold /bitcoin chart, it’s not hard to see that recently, gold, in contrast to bitcoin, has maintained impressive stability amid market uncertainties, while bitcoin has been experiencing drastic ups and downs. If we stretch the chart to a longer time frame, we can even spot that BTC has appreciated against Gold consistently since its birth. Can bitcoin eventually replace the $10 trillions market size of gold — nearly 10 times of what bitcoin is now?

Bitcoin is widely promoted as an alternative safe-haven asset, whereas charts have manifested the opposite. Since the second half of 2021, bitcoin has been traded in close correlation with the growth-stocks-saturated Nasdaq index, meaning that bitcoin is viewed by the market as a risky asset. Its high volatility and unpredictability continue to be a hindrance for traditional investors. Before the Ukrainian crisis was fully reflected in the broader market sentiment, bitcoin had been steadily trailing downward along with mid-cap growth stocks since November.

Bitcoin has been traded in closely correlated with S&P 500

So, Bitcoin is by far unlikely to be viewed as a risk-averse asset like gold or the dollar which, in its recent history, has never dropped 20% within a day. In the long run, the dollar is expected to devalue gradually as the Fed shows no intention to aggressively reverse the low-rate policy and stop money printings. Bitcoin may continue to be in such a ambivalent state — getting sold off as the inflation remains hot, but rallying whenever geopolitical uncertainties deepen, causing waves of financial turmoil.

The Gold Standard

The Roosevelt administration seized all gold bullion and coins via Executive Order 6102, forcing citizens to sell at well below market rates in the 1930s. That happened in the age of the gold standard — when each American dollar bill printed by the Fed had to tag along with the amount of gold inn reserve.

The gold confiscation was a controversial act aimed to enable the government to print more money to stimulate the economy out of the depression and thus reduce the overall supply of gold circulating in the market.

This incident reflected the intrinsic problem of deflationary currencies like bitcoin and gold. In a time of financial emergency, for instance, the outbreak of Covid-19 pandemic in the March of 2020, if we had been stuck to either gold or bitcoin standard, the Fed would not have been able to “print money” to stimulate the economy and a financial catastrophe that repeats the tragedy of the Great Depression would have been unavoidable. A fixed supply of any reserve currency would, as a result, cripple the Fed’s abilities to adjust its monetary policies in accordance to economic condition.

The Fed putting out relentless quantitative easing measures and lowering interest rate to nearly zero prompts people to question the integrity of its policies. The opposite of the source of current problems might not be the most effective solution for the ongoing mess, but we often tend to think in that way. In fact, we need both deflationary and inflationary currencies to sustain a healthy economy.

The Bitcoin Standard？

As claimed by experts and crypto critics, bitcoin and other cryptocurrencies, realistically speaking, are unlikely to be used for evading sanctions, due to the current size of crypto market offering limited trading liquidity — a view also shared by Blockchain Association Head of Policy, Jake Chervinsky.

The barrier isn’t based upon the attributes or the technicalities of cryptocurrencies, but the current limitation of the market size. When cryptocurrencies grow to be a-dozen-trillions market size, with billions of users who have adopted decentralized wallets to conduct day-to-day transactions, cryptocurrencies will then be a genuine challenge for governments to enforce sanctions.

Ideally speaking, whether you’re pro-Ukraine, donating cryptos to decentralized wallets that link to the Ukrainian government, or pro-Russia, trying to assist the civilians or even the ruling party to access cryptos to preserve purchasing power, you shall not be deterred by any forces because the right to transact shall be the fundamental right under the protection of the Constitution.

Yet, it is not!

In the pursuit of an alternative standard that bypasses the dollar hegemony, yet the big step ahead would be decoupling bitcoin price in relation to the dollar. 1 bitcoin isn’t equal to $40K or $50K USD; instead,1 bitcoin is worth 1 bitcoin. A property costs 10 BTC; a Tesla costs 1 BTC.

Period.

Once bitcoin as a store of value has been generally accepted, with rising adoption and improved Layer 2 networks like Lightening Network processing transactions in a much lower cost and a faster speed, the bitcoin standard will naturally arrive.

Exchanges as affiliated crypto banks, a new intermediary that replaces traditional institutions, continues to thrive, partly because there is a huge demand for withdrawing cryptocurrencies for fiats.

After the Ukrainian government received all the donations, it still had to “cash them out” in centralized exchanges, where they exchanged the cryptos for fiats. We need fiats to pay bills and buy groceries. That’s why, to most crypto users, the final step always ends up in the exchanges which have been closely supervised and about-to-be further scrutinized by regulatory bodies.

In the future, people may convert BTC to USDC that pegs 1:1 to the dollar that sits in their TD bank accounts. The USD and cryptocurrencies can coexist. People will make their decisions on which currency is more pragmatically useful according to their specific needs.

As tweeted by Changpeng Zhao, the founder & CEO of Binance, the biggest crypto exchange in the world, we don’t need exchanges to use cryptos and all we need is just a decentralized wallet boosted by open-source technology.

Can we imagine and work for a future where cryptocurrencies coexist with the fiats? People can choose to get paid in cryptos or fiats, pay a bill in BTC or in the dollars in your checking account, and take a BTC mortgage loan for housing.

Is it possible?

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SWIFT, Financial Censorship, The Bitcoin Standard (II)

Bitcoin as a Commodity

Speculative or Risk-Averse

The Gold Standard

The Bitcoin Standard？

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Written by Jay Zhuang