Crypto as a Global Reserve Currency

This is all ridiculously hypothetical; and is probably best ignored. Bust, having had the thought, I can’t stop thinking about it. So if you are in to detailed descriptions of low probability events, please enjoy the rabbit hole.

I know people like the idea of a gold standard, but it is unpalatable. Having worked in mining, there is a tail risk a deposit can be found which devalues existing assets. It is pegging your finances to the unknown, and it was abandoned for a reason.

This is why, since World War II, the USD has been a global reserve currency. And it kept this role after it abandoned the gold standard in the 1970’s. This has remained the case for a number of reasons:

1) The US has been a surprisingly large chunk of global GDP: in the post WWI world under the Bretton Woods system, the US at one point represented 50% of GDP, crucially at a time when other countries were getting their financial house in order. US treasuries, particularly when the dollar was still backed by gold, were one of the safest investments. A reminder that US debt isn’t just about profligacy, but also about long-term yields.

2) This created a built-in house wins effect - when the US removed the gold standard, countries stayed with the USD because it was still so stable compared to other options - and they were already heavily invested. As a fiat, the US can run higher deficits because other counties hand it cash for their own stability stability (you can almost think of US debt like tribute to a dominant political power, or protection money to the mafia).

3) No competitors. I understand the skepticism about fiat in this community - but if you had to choose a fiat, what would be the alternative to the USD? The Renminbi’s value is manipulated by Chine. The Euro lacks a body like the US federal reserve to intervene in the event of inflation, and the block is increasingly unstable.

The US government has supported its currency as the global reserve currency because it vastly strengthens its hand in international diplomacy. US sanctions against countries like Iran are effective because the US can enforce financial penalties via soft power through other countries banking systems. This is why there is increasing pressure from countries like Russia and China to find another reserve currency.

But it is bad for the US economy to be the reserve currency. Think about manufacturing. If your currency goes through inflation, then your exports cheapen relative to other markets. This is why the Chinese government tries to peg the Renminbi at a little over 8 yuan to the USD. Thus they can Incentivize manufacturing to move to their county. The US cannot play the same game - because it is the denominator for other countries financial systems, it is guaranteed to be on the losing side of the equation every time. Thus despite its strong post-war economy, manufacturing was always doomed to leave, which has introduced instability in the US political system. Allowing the USD to inflate (as all fiats want to do) relative to a global currency would incentivize manufacturing to return. Or, at minimum, stem the bleeding. That said, there would be significant disruption from the higher deficits the US has run for decades.

Crypto As The Global Reserve

For a global reserve currency, the following conditions must be met (there are others, but this is the minimum):

• Must remain stable (I can hear the eyes rolling, but hang in with me here)
• (politically) Must convince other nations that it is at greater risk of deflation than inflation (e.g. value more likely to go up than down over the long term).
• (politically) Must have a secure transaction system that cannot be manipulated to benefit one country over another (e.g. satisfy concerns of China, Russia, and others).

Crypto, despite its short life, is capable of achieving these. The system designed by Satoshi and adopted by others is as strongly counter-inflationary as possible. From the viewpoint of a global reserve currency, this structurally removes the need for a body like the US federal reserve. The deflation side of the coin would potentially convince the US government to let go of its global financial role for the sake of economic growth.

The big negatives of using crypto as a global reserve are its current volatility and its slow transaction times. The latter is a technological problem that can be solved either by speeding up times or guaranteeing value at time of transaction. The first I suspect may be a self-fulfilling prophecy. Once a currency is the global reserve denominating debts, confidence would follow out of political and financial necessity. Power resides where people think power resides. This would be a long term road for Crypto if it continues for the next two decades.

Ideally; a slowly deflating world reserve would provide inflationary benefits to all counties. It would also potentially stabilize fiat currencies barring government manipulation. But in that case, government manipulation would be more obvious and less an us-vs-them scenario given the current financial system.

Any such transition, should it happen, would taken one of two form. Either a) a significant economic crisis forces the US to accept a shock on its high deficits or b) the transition to crypto occurs slowly enough over decades to allow a battleship-style course realignment.

The biggest obstacle I see to crypto is climate change. Most countries take it very seriously (imho, as they should), and crypto has a high energy cost, thus a high carbon cost. Most countries are bound by diplomatic and treaty agreements to hit certain targets. A crypto system would need to resolve this to have a chance at being the global reserve. Or, renewable energy infrastructure would be built fast enough so that a given crypto is at least carbon neutral.

Lastly, it is possible that this transition could happen after mining is no longer profitable. If Bitcoin, for example, exists in 2050 and is still undergoing slow deflation while block rewards are infinitesimally small, it may behave in ways that satisfy concerns about stability.

tl;dr: Structural deflation in crypto could satisfy political and economic needs for a global reserve currency in a multi-polar world.