“I trust no one not even myself” - Joseph Stalin
In 2009, Russian President Reference Dmitry Medvedev hosted the first BRIC (Brazil, Russia, India, China) Summit in Yekaterinburg to explore how to establish a fairer international system and to discuss parameters for a new financial system. (South Africa was added in 2010)
The implications of BRICS' de-dollarization initiatives are significant as the US dollar plays a dominant role in the global financial system and impacts various aspects of world affairs. The New Development Bank's use of local currency financing instead of solely relying on the US dollar is just one example of BRICS' efforts to reduce the dollar's influence. These nations have also reduced their holdings of US treasuries in their reserves post 2008.
The share of the US dollar in Russia-China trade has dropped from 90% in 2015 to 46% in 2020. This among other initiatives, led by reform-oriented rising powers and strategic US adversaries, aim to challenge the existing US-led dollar-based financial system. These efforts may serve as indicators of a larger de-dollarization movement which poses a simple question.
If various nations want to get off the dollar what will they try to replace it with?
During the BRICS Summit in June Putin stated, “The matter of creating the international reserve currency based on the basket of currencies of our countries is under review” meaning that Brazil, Russia, India, China, and South Africa plan to issue a new global reserve currency.
If history has taught us anything it’s that nations hardly ever get along for extended periods of time. We must take this into consideration when looking at any system that aims to dethrone the dollar. Doing so brings clarity to the evaluation allowing you to predict the likelihood of success of alternative systems.
All currency systems require trust, if they cannot build trust organically their use will require coercion. In order for a system to establish trust it must have the following properties.
The exact form of the dollar's competitor system remains uncertain. Many nations are already signaling they intend to move away from the use of the dollar/ US treasuries as their reserve asset by using a CBDC (central bank digital currency). There are currently 109 countries at various stages of development of CBDCs.
CBDCs are fully programmable, meaning deposits and spending can be controlled at the individual level. They represent the full merger of fiscal policy, monetary policy, and policing. This means that banks can determine interest rates, deposit limits, spending limits, and permitted transaction counterparties for every individual and every token for any period of time. In short this means complete control over the who, what, when, why, where, and how people use their money. It is likely that individuals will seek alternatives if governments or central banks attempt to use their central bank digital currencies (CBDCs) to exercise control over their spending or saving.
Gold bugs advocate for and believe that a gold-backed stable coin is the likely path forward. They claim that the BRICS nations will create a stable coin based on either gold or a basket of commodities. However these claims are likely over stated, if you reference Putin’s quote above they want to create the new reserve currency based on a , “basket of currencies” which are likely to be some form of CBDC.
A recent article in the Russian newspaper Vedomosti highlighted the shortcomings of the idea of a gold backed currency and give a window into what BRICS nations really believe when it comes to gold backed stable coins.
The creation of a stablecoin for external settlements under the conditions of sanctions looks as expedient as possible, but it all depends on, how at least two countries will be able to agree on the adoption of token as payment. This idea has long been offered by many banks in search of a replacement for the dollar or USDT ( Tether stablecoin, tied to the dollar), which does not have liquidity and casts doubt on its security. Technically, such payments are easy to organize, but two questions need to be answered: where to store gold for collateral and who will play the role of intermediary banks, if the buyer or seller wants to exchange the token for a fiat.
Maria Agranovskaya, managing partner of the grad bar association
As Maria pointed out, The primary challenge with commodity backed currencies is the expense to redeem the underlying asset. Even if you create a functioning stable coin that is, “backed” by gold you will always run into the same issues. Gold is expensive to store securely, and regardless of what is built on top of it you will always need an intermediary to manage the systems redemption process if someone wishes to take custody of the underlying asset. Since you must introduce a trusted third party into these systems you will inevitably see the same cycle play out.
The only solution to this problem is to create a system that is not based on a trusted third party. Backing anything with gold or any other commodity just starts the cycle over again, effectively reinventing the wheel of financial abuse.
The latest attempt at breaking this cycle was introduced into the free market of money on October 31st 2008 by Satoshi Nakamoto.
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.
Satoshi Nakamoto
Because this system is entirely voluntary, does not require a trusted third party, does not censor transactions, does not require KYC to set up a wallet, does not require a bank account to set up, is effectively free to take custody of, can be moved around at no cost, and is limited in supply to 21 million. A compelling case can be made that when compared to other options it is the clear winner.
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