Bitcoin

When governments deprive us of bitcoin like they did with gold

On April 5, 1933, Implementing Order 6102 was enacted in the United States that was clear and specific: “Hoarding gold coins, gold bars and gold certificates is prohibited in the United States“” This ended at a time when the only officially recognized reference standard from 1900 was gold.

The American monetary system was based on the gold standard, but after the Great Depression the United States government He was looking for ways to have all the gold stocks to give the dollar stability. As we know, banks spend their own money, and in the case of gold, this was not possible because it is a scarce resource. Back then, George F. Warren, a leading economist and Franklin D. Roosevelt, was very close to the idea of ​​removing the gold standard. Warren’s justification was that to save the countries from the economic depression, it was necessary to generate inflation and raise prices.

Roosevelt’s action allowed him to manipulate the gold price by controlling the offer with this provision. All holders had to deliver all of the physical gold to the Federal Reserve in the form of gold bars, coins, or certificates. In return, the institution gave them $ 20.67 for every troy ounce. Under these conditions, people could only have a maximum of $ 100 gold in the form of coins. However, the restriction was lifted for those who used gold for their work. They could apply for people who did not respect circular 6102 Fines of up to 10 years in prison, then a fine of $ 10,000 or even both. In the following days, gold increased its price at its own discretion and reached $ 41.34 an ounce (Agricultural Adjustment Act, May 12, 1933).

The idea of ​​bitcoin as a replacement for gold

When governments deprive us of bitcoin like they did with gold
When governments deprive us of bitcoin like they did with gold

On repeated occasions, there have been comparisons between gold and Bitcoin, either in price or in what they represent as a store of value, by sharing certain features like scarcity. Therefore, this was considered Bitcoin has a similar function to gold and is becoming digital gold. In fact, one of Bitcoin’s predecessors, Nick Szabo, relied on the operation of gold to propose the creation of a decentralized structure with cryptography that would enable transmission over the Internet a digital asset with a high value that was scarce and difficult to get.

The idea of ​​using gold and bitcoin as a store of value has converged in criticism of governments that They spend a disproportionate amount of money, which leads to serious economic problems such as currency devaluation. For example “gold bugs”, ie people who see physical gold as a store of value Providing support for paper money in the face of its devaluation suggests that gold prices could continue to rise if government central banks did not change their monetary policy. In fact, on several occasions it was believed that governments could take a similar action to 1933: confiscating gold as part of a strategy in the face of a possible national emergency.

Companies like Coinbase state that bitcoin will even outperform gold as a reserve. A recent report released by the exchange highlights that Bitcoin and gold are similar mainly due to their scarcity and their global accessibility. Repeated indeed Bitcoin has been suggested to be “digital gold”.

CBDC projects

A CBDC is a digital currency that is issued by a government. One of a country’s first cryptocurrencies was the petro, created by the Venezuelan government and backed by oil reserves. However, the project did not achieve the expected results because it is not credible. The closest in the ecosystem are stablecoins, a cryptocurrency that is based on the price of another underlying asset, such as a currency or commodity. One of the most outstanding features is that a stable coin, unlike the money that is held in a bank account, offers improvements in exchange, for example the speed with which it is transferred, especially when it comes to larger amounts. at $ 10 thousand. In general, developing a central bank-created cryptocurrency has an advantage in:

  • Transactions between financial institutions and users are easier.
  • Shipments can be made at any time.
  • The emission costs would decrease significantly.

A 1996 Treasury release mentions that the United States More than $ 60 million was spent annually on processing, accounting, storage, transportation, and security alone and electronic money would eliminate most of this expense; However, others like cyber security would emerge.

As we wrote in other Cointelegraph articles, central bank digital currencies (CBDCs) have now attracted more attention from the pandemic. In December 2019, it was reported that the Bahamas would conduct tests with its own CBDC. Later, in February of this year, it was announced that Sweden would launch a pilot program to use the “electronic crown” called “e-krona”. On April 21 of the same year, the Dutch central bank (Nederlandsche Bank) published a report indicating that it would “be ready to play a leading role in developing its own digital currency and currency”. digital for Europe, which questions the role of central banks in adapting payment systems to the new needs of citizens. Finally, China and the digital yuan, which many are considering, is one of the countries whose project is receiving the most attention as a threat for other currencies like the dollar and after a negative stance on the use of cryptocurrencies, they finally seem to have found more benefits with blockchain technology. Based on information leaked, it actually did. He indicated that digital yuan tests had already been conducted in four cities, namely Shenzhen, Chengdu, Suzhou, and Xiongan, and that the Bank of China on 24. March had ended with the development of the functions of the digital currency.

From the Bank for International Settlements, Agustin Carstens has taken a different stance from the one he has shown at some point since he pointed out in December 2019 that The development of the CBDC could bring about profound changes in finance. One of the main advantages that stand out is that Availability 24 hours a day and that financial institutions would provide liquidity.

As I mentioned in a column from August 2019, projects like Libra They pose a real risk to countries, and this has forced banks to rethink countries’ idea of ​​creating a CBDC. When we add the factor of the epidemic, it is more than understandable that central banks have understood that spending a digital currency can be more beneficial to governments than counterproductive.

A document published by Warren Weber (2016), a researcher at the Canadian Central Bank, indicated that the use of a crypto asset like Bitcoin as a currency This would limit countries’ ability to make money and stay in control. Likewise, they could not implement policies or establish a governance scheme for cases like Bitcoin that are based on decentralization, and there is no one who controls the network.Under this system, governments would lose the ability to do one or both of the Bitcoin standards. This is probably one of the reasons why projects like the Libra have been limited. Some central banks, such as the Netherlands, have even indicated that the development of this type of digital currency such as the Libra is jeopardizing stability. For this reason, it was recommended at this time to examine the question of digital currencies by country.

How does Bitcoin become 21st century gold?

We are increasingly seeing the trend of how governments will create their own cryptocurrencies. Some positions, such as that of Barry Silbert, CEO of Digital Currency Group, a venture capital firm focused on the cryptocurrency market and blockchain technology industry, suggest that CBDCs can be positive for other crypto assets like Bitcoin. In this article, however, the idea is completely opposite to what I will explain next.

So far 2 specific topics have been addressed: 1) the process of eliminating the gold standard and 2) the creation of CBDCs by countries and the question is, at what point do the two issues converge? Here I am going to propose a hypothesis that we are likely to test for years: the history of eliminating the gold standard is repeated with cryptoactive, and in the following paragraphs I will allow myself to explain this hypothesis.

It is almost a fact that if an economic power makes the decision to create its cryptocurrency, the other countries will too. The acceptance of cryptoassets has currently increasedFor example, a 2017 HowMuch website report highlighted that Bitcoin’s total value was barely comparable to the fortune of Larry Page, one of the founders of Google. However, the crypto market was not that far behind the value of Amazon or Apple and was four or seven times smaller. In September 2019, crypto assets appear to have gained a lot more ground in the market as Bitcoin’s value has doubled this year. However, the total participation in money was only 0.59%. Bitcoin’s average daily liquidity increased from 2018 to 2019. from $ 6.05 to $ 16.73 billions, almost comparable to German bonds $ 19 billion;; However, gold remains a highly liquid asset via crypto assets and is higher than that $ 112.5 billion in 2018 (HowMuch, 2018).

BitFlyer recently conducted and identified a trust level survey on Bitcoin in Europe an increase of 3% from 2019 to 2020;; The transaction volume also increased significantly, as LocalBitcoin recorded mainly in Latin America. The market value of all crypto assets at the time of writing is $ 44.8 billion.

It is clear that the fact that market value is among the first places of all money moving in the world does not mean that the assumption is proportional. In fact, this space it occupies is largely due to the high prices that Bitcoin has come up with. So this point is interesting because we can see how it is that the cryptoactive industry occupies an important place in the amounts of money that move around the world, despite little acceptance. From the above, the question arises: What would happen if these capitalization levels were added to the accelerated adoption levels?

You will certainly agree with me: The probability that the cryptoactive industry will prevail worldwide is much higher. This is where the hypothesis that I propose comes in and picks up the following question: what was the government’s position on the control of crypto assets? When the phenomenon started, there was not much clarity in the countries because it was not fully understood. As a result, the possibility was to prohibit this, and the rules were gradually transferred to the introduction of certain rules based mainly on the recommendations of the FATF (the body responsible for issuing anti-money laundering guidelines) of change that must comply with the regulations. From the above it is possible to understand that for the time being lGovernments have not taken any other action on crypto assets, but have allowed them to live with the financial system with certain reservations;; However, we should consider the idea that there will be a time when the crypto market is much bigger. We are still missing some phases that we have to experience. It is very likely that we got used to systems like WhatsApp or Facebook in the same way in a natural way and without “evangelization”. Governments are getting used to using their digital currencies. And if governments’ digital money levels grow along with the introduction of crypto assets, it will practically be a fact that governments are issuing new regulations to seize or depreciate the prices of other crypto assets like Bitcoin so that there is no place or are they just not attractive to negotiate in the market and how can they do that? The answer is not very complicated: through cryptocurrency exchange houses.

It is known that economic phenomena behave like cycles, ie phenomena that occur in the present, many have occurred in the past (like economic crises), and in some way we can intuitively grasp the behavior and the results. In this sense to draw the analogy of Bitcoin’s behavior with gold and to think that digitization is increasing exponentially; It is very likely that governments will consider the possibility that Bitcoin will actually become digital gold following the same pattern of behavior.Then Bitcoin is used as a hedge mechanism and is one of the most traded assets in the world.

The worrying thing about this scenario is that Bitcoin is becoming a store of value, but not exactly for people, but for governments. Like gold, bitcoin is confiscated with the information of the exchange when it reaches a high adoption volume and accumulates in vaults, just like gold. Therefore, it is logical to think that the admissibility of governments to work with Bitcoin through centralized exchanges (CEX), so that ultimately the same exchanges do the “dirty work” to collect the information and in the future provide the information to the Users who own Bitcoin while governments perfect their own digital currency logs.

Acknowledgments: I would like to acknowledge and particularly mention Zuri Marcos, a well-known Mexican trader and investor who supported me in the design of the ideas described above.

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