Why every person, company, asset manager and government will eventually own Bitcoin: Part 4— Governments
In the final part of this series, I want to cover why I believe every government will eventually own Bitcoin. If you would like to read the first three parts of this series you can click on the following links to why I believe the same will happen with every person, every company and every asset manager.
Let’s start with a simple fact. Numerous governments around the world already own Bitcoin. While we do not have a complete list of every government currently holding Bitcoin or the precise amount of those that are, there are a few pieces of public information we know for sure. The Swiss canton of Zug now accepts Bitcoin for tax payments and therefore will be receiving and holding Bitcoin. Argentina and Paraguay used Bitcoin to settle an international export deal. In November of 2020, the US government announced it had acquired $1 billion worth of Bitcoin from a hacker involved with Silk Road and has yet to auction it off. In 2017, Bulgaria seized 200,000 Bitcoin with conflicting reports of whether they auctioned off those assets or still own them. Iran, having once banned Bitcoin, has now done a complete one-eighty and is actively using Bitcoin to get around US sanctions. North Korea is doing the same. Venezuela’s president Nicolas Maduro publicly stated the country is using Bitcoin in both domestic and global trade, as part of efforts to neutralize crippling U.S. economic sanctions. Undoubtedly, there more governments beyond this list that have become active in acquiring Bitcoin that we aren’t yet aware of. Therefore, this isn’t a question of if governments will own Bitcoin, it’s a question of the magnitude by which various governments will embrace Bitcoin.
Let’s unpack why.
Hedging Against Fiat Currency
Having cited this same reason for individuals, corporations and asset managers to hold Bitcoin, I’m going to sound like a broken record with this reason. However, that doesn’t make it any less true. Despite having moved off of the gold standard a long time ago, many central banks still hold significant gold reserves.
So, if the fiat currencies of these governments are no longer backed by gold, why do central banks still own gold despite their high cost of storage? One answer is gold acts as a hedge against inflation, or even hyperinflation, of their own currency and other severe economic catastrophes that might occur. In fact, it’s worth noting that since 2010, central banks around the world have turned from being net sellers of gold to net buyers precisely because they want to make their currency more reliable than competing currencies.
Fast forward to 2021 and we now have a superior alternative to gold as I have discussed in detail in a previous post. In time, central banks will keep Bitcoin in their reserves for the same reason corporations will put it on their balance sheets. It’s a better store of value. It’s cheaper to store. It’s faster, easier, and cheaper to transact in case of an economic emergency (how long would it take to move tons of gold out of one vault and into another?). Bitcoin is superior to gold in every way except adoption and that gap is quickly closing.
I fully expect to see central banks start to add Bitcoin to their balance sheets in the coming years especially since state governments in the US, which manage their own treasury reserves, have already begun to do so. Wyoming, arguably the most forward-thinking state in the US with regards to cryptoassets, already holds Bitcoin in its treasury reserves as part of its diversified portfolio. Soon, federal banks will do the same.
For the same reason they currently own gold, every government and central bank will eventually own and hold Bitcoin in their reserves. It’s just a matter of time.
Circumventing the Dollar
The US is in a very privileged position because the dollar is the world reserve currency. Regardless of whether a US company is involved in a transaction or not, the majority of international trade is settled in USD, 88% of foreign-exchange trading involves the dollar and 62% of the reserves held in central banks around the world are denominated in dollars.
Thus, the US doesn’t have to rely solely on its military to project power and influence throughout the world. Controlling the currency that most global economic activity is dependent on gives America tremendous economic power and our government is not afraid to wield it.
Before I go on, I want to be clear that this post is not meant to praise or critique US policy. I am neither agreeing nor disagreeing with any US sanctions that have been enacted. Regardless of your opinion on this topic, the important fact to realize is that the US has this power, has routinely chosen to use it, and doing so has had a material impact on the economy of other countries to which the rest of the world is reacting accordingly. For purposes of this post, it’s that reaction that I am interested in.
Thanks to the fact that the dollar is so intertwined with global payment systems, the United States has the capability to intervene in financial transactions and enforce economic sanctions. For example, since 1979 the US has applied various economic and trade sanctions against Iran which have severely impacted Iran’s economy over the years. The most recent sanctions, particularly those imposed on the energy, shipping and financial sectors, prevented other countries from trading with Iran and caused foreign investment to dry up. In 2017, the US imposed sanctions against Venezuela which is estimated to have caused $17-$31 billion in lost revenue to the Venezuelan government. Later that year, the US threatened to cut off China’s access to the US financial system if it didn’t follow existing sanctions imposed on North Korea. Just the risk of sanctions is a powerful deterrent because even if a foreign company does not operate in the US market, it likely works with a bank that does and thus, may not be able to be banked if they are found to be trading with a country that has been targeted by US sanctions.
This is only possible because the United States controls the global reserve currency that the rest of the world is currently dependent on. While an effective strategy, weaponizing the dollar in this manner has also sparked the rise of interest from numerous countries to find alternatives. In his book, Erik Townsend highlights recent public statements various countries have made. Russia has been the most vocal on this topic, putting forth a “de-dollarization” campaign, saying that the “US has shown a consistent pattern of abusing its control over the dollar and that as a matter of self-defense, all governments around the world should stop using dollars to settle international transactions.” China has publicly proposed replacing the US dollar as the international reserve currency with a basket of global currencies controlled by the IMF.
But it’s not just America’s enemies that are growing frustrated. In 2019, the Governor of the Bank of England, Mark Carney, gave a speech to other central bankers specifically calling out the disproportionate amount of power of the dollar gives to the US. Longtime ally Germany has called for the creation of a new payment system independent of the US. The European Union has stated it plans to launch an alternative settlement system by 2022 that is independent from US influence and allows them to bypass any sanctions imposed by the US. Even our allies have grown tired of the US’s stranglehold on the world reserve currency.
As a result, many countries have started turning to Bitcoin as an alternative. As highlighted earlier in this post, it’s been confirmed that Argentina, Paraguay, Venezuela, Iran, and North Korea have already used Bitcoin for this expressed purpose. Switzerland, South Africa, France, England, Russia, Austria, Germany and Bosnia have met with Iran to discuss using Bitcoin for international transactions. And that’s just the countries in which it has been reported. Undoubtedly there are numerous other countries using or at least exploring the use of Bitcoin for economic trade.
Bitcoin isn’t a perfect medium of exchange yet. There is short term price volatility, the market cap is small relative to other global currencies meaning there isn’t the same liquidity available, and although adoption is growing rapidly, it’s still not nearly as pervasive as other global currencies. However, Bitcoin does have a key advantage over every global fiat currency in that it’s not controlled by any one party. The fact that its decentralized means that no country can prevent another country from using Bitcoin nor can Bitcoin be manipulated by any one government. Balaji Srinivasan calls refers to this as preventing financial deplatforming. Add in the fact that all transactions are transparent and verifiable means countries do not have to trust each other to transact in Bitcoin, merely trust the code to execute as intended. Even Citibank recently released a report stating “Bitcoin could become the currency of choice of international trade.” As Bitcoin continues to grow, this key feature will attract many more countries to use it for bi-lateral trade between nations.
I readily admit I do not have all the answers on how this will play out. I suspect this means US sanctions won’t be as effective in the future and that the US will lose at least some of the leverage and power it currently holds. I don’t know if that’s good or bad for the global economy but that is what will likely happen. As long as the US dollar remains the world reserve currency, there will be more and more incentive for other governments, ally and enemy alike, to adopt Bitcoin.
Bitcoin Strengthens CBDCs
I stated in part one of this series that while I believe every person will eventually own some amount of Bitcoin, its likely to be the case that Bitcoin won’t be the only digital asset they own. Same holds true for governments.
Central Bank Digital Currencies (CBDCs) are digital forms of fiat currencies built on a blockchain. The biggest difference between Bitcoin and CBDCs is that while Bitcoin is fully distributed and not controlled by any one entity, CBDCs would be controlled by the government that issues them. While these currencies are still early in their development, the hope is that a new digital dollar, digital yen, digital euro, etc, would increase payment efficiency, lower costs, increase visibility into the flow of a country’s capital and enhance monetary and fiscal capabilities of the government.
I personally find the potential implications of CBDCs incredibly fascinating. I plan to write a future post digging into the details of why governments would want to replace fiat currencies with digital versions and the potential ramifications that could have, both good and bad. However, for purposes of this post, its sufficient to know that China, Sweden, Australia, the Bahamas and the Eastern Caribbean Currency Union are currently developing their own CBDC. In addition, the central banks of the US, England, Canada, Japan, as well the European Central Bank and the Bank for International Settlements (BIS) have publicly stated they are exploring the use of CBDCs. Some estimates conclude that 80% of all central banks around the world are exploring their own CBDC.
The point is CBDCs are coming, but what does that have to do with Bitcoin?
As previously mentioned, even though most of the fiat currency in the world is no longer backed by gold, many governments still hold gold and US Dollars as part of their foreign exchange reserves. These reserves are used to settle accounts between central banks and defend the market value of their local currencies. Gold and dollars are the physical backstop for an analog world.
However, as central banks move into a digital world, they will need a digital backstop for their CBDCs. Bitcoin fills this role beautifully. Bitcoin is already held by people around the world and is already arguably the best settlement system in existence. Bitcoin also is an ideal safe heaven asset because its supply is capped, and its monetary policy is programmatically predetermined and fully transparent. This means that governments can enact whatever monetary policy they like with their CBDCs (create as much or little of it as they want and when they want) but Bitcoin will be the trusted backstop should something go awry.
As Nik Bhatia summarized it in his book Layered Money, “Bitcoin is the first ever government free, universally accessible digital currency. And for these reasons, all currencies in the purely digital realm will face price discovery in BTC terms. This means that all digital currencies, from cryptocurrencies to CBDCs, will be measured in BTC.”
For the same reason central banks have been net purchasers of gold for the past decade, central banks will be net purchasers of Bitcoin in the coming future.
The New “Space Race”
The 1950s saw the beginning of the “Space Race” between the US and the USSR. When the Soviets launched Sputnik 1, it catalyzed the US out of fear for national security and resulted in the US becoming the first nation to put a man on the moon as well as developing a variety of other innovations. Today, we are entering in a new space race of sorts, this time in the realm of digital finance.
China is already testing a digital yuan that its citizens can send to each other via smartphones. China has made the digital yuan a public priority and has an ambitious goal of displacing the U.S. dollar with its own digital world reserve currency. Combined with the fact that a large volume of crypto trading and mining activities occurs in China, they have emerged as a global leader in the cryptoasset landscape.
Similar to the relationship between the US and USSR in the 50s and 60s, there is no shortage of geopolitical tension between China and the US today. This competition could prove as a catalyst to kicking off a 21st century arms race in the realm of digital finance. This arms race is likely to have many facets including mining power (neither will want the other to have more mining control of the network), CBDCs (China is looking to replace the dollar and the US is already exploring launching its own CBDC), and most importantly, the accumulation of Bitcoin.
I already discussed how and why Bitcoin will likely be used by central banks to backstop any CBDC that government creates. What happens when China, or Europe or any other major central bank makes the first public announcement that they are holding Bitcoin? Because there will only be 21 million Bitcoin ever created, whatever amount of Bitcoin one central bank owns, that is a portion of the best digital reserve asset that no other central bank can hold. I suspect this zero-sum game will kick off an arms race across the globe to accumulate Bitcoin in the name of national and economic security.
Conclusion
Any one of the reasons I outlined above may compel a government entity to adopt and hold Bitcoin. Admittedly speculative, I think governments will be incentivized to take a direct role in supporting and owning cryptoassets, especially Bitcoin. The tide of pro-crypto regulation that is already occurring in places such as Wyoming, Rhode Island, Kentucky, Switzerland, Singapore and more feels like kindling on a fire that’s about to erupt.
