Trading oil and gas commodities in currencies other than the US dollar has been floated before, for political and monetary reasons. For instance, OPEC member states have proposed denominating the price for their hydrocarbon commodities in fiat currencies other than the US dollar. Iran, for political and economic reasons, is most active in pursuing this policy, encouraging trading partners to pay for Iranian oil in alternative currencies.
A report issued in June by the Kuwait-based investment banking and asset management firm Kuwait Financial Centre (Markaz), titled “Disruptive Technology: Bitcoins, Currency Reinvented?” proposes that OPEC countries use Bitcoin (BTC) in oil trading for their own benefit. While impractical for political and economic reasons, this indicates how far BTC has come, to be granted considerable evaluation by international organisations as commodity money.
So could it be an international reserve currency in the long run, as it slowly, but surely, matures?
BTC as “Digital Gold Standard”?
This graph tracks the number of countries which suffered banking crises between 1800 to 2000. Based on This time is different: Eight centuries of financial folly, it covered a sample of 70 countries, with an upward trend attributable to various factors. A gradual increase in the proportion of people receiving money for their labour is one factor, but most notable is the virtual absence of banking crises during the period of the Bretton Woods agreement.
In force from 1945 to 1971, the gold standard brought stability back to international currencies, providing a fixed reference point and transforming fiat currencies into commodity-backed currencies – a currency based on an underlying physical commodity widely acknowledged as having intrinsic value. Australian and Canadian dollars are sometimes referred to as commodity-backed currencies, as these countries have significant gold reserves.
In 2013, the total market value of all Bitcoins grew by a factor of 56. More recently, as of September 2014, major MNCs and tech firms such as Dell, Paypal, Expedia, Overstock, TigerDirect, WordPress, Zynga, DIsh and other smaller firms have begun to accept BTC. Bitcoin-related startup companies have attracted $228 million in venture capital as of June 2014, according to Venture Scanner.
Despite this, BTC lacks the transaction volumes of payment giants like Visa and MasterCard. This is using Coinmetrics data that places bitcoin’s daily transaction volume at US $89 million. BTC also lacks maturity, both as a technology and feasible currency alternative, with many issues to resolve in the coming decade.
BTC, like any fiat currency, rests on a foundation of belief by a critical mass of users, but without the backing of a government. Being purely market-driven, it’s not as vulnerable to political manipulation as fiat currencies, which rely on the the legal recognition provided by governments. But if BTC acceptance isn’t widespread, BTC can easily become defunct in a matter of months, if not weeks.
Like BTC, gold is commodity money, which has intrinsic value. Gold has a number of applications, but is mostly used for making money and jewellery, rather than non-ornamental items. Comparable to gold as an analogue, BTC could potentially serve as a digital gold standard in the digital domain, especially when its more mature.
BTC is money, being a medium of exchange, unit of account and store of value. BTC matches the characteristics of gold in terms of:
- finite supply
- non-ornamental uses in the digital space – domain name management, asynchronous private communication, smart contracts and distributed/decentralised autonomous corporations
- intrinsic value (especially in the digital sphere)
In the long run, Bitcoin (BTC) will enjoy reduced volatility and increased stability, with greater legitimacy as the private entities in the Bitcoin ecosystem mature and regulations evolve. When regarding BTC, or a new gold standard as a possible international reserve currency, an international currency is used and held outside its home country for transactions with residents and between non-residents.
International use involves the three functions of money — as a store of value, medium of exchange and unit of account — and their use by governments and private actors. With the USDs legitimacy as an international reserve currency being questioned, Australian and Canadian dollars have been termed as potential international reserve currencies by the IMF, due to the strength of their currencies backed and sustained by their commodities.
The Chinese renminbi (i.e. the yuan) and Singapore dollar are also under consideration for that status. China is the second biggest global economy and an aggressive gold importer, while Singapore is currently a preferred destination for global savings and gold storage. This is due to Switzerland being compromised by the IRS and other tax authorities.
With Bitcoin becoming deflationary as it matures, increasing to a limit of 21 million units sometime in the middle of the 21st century, it presents a an alternative that is objective in nature, uncontrolled by any single government and resistant to political pressures.
Perhaps the financial realm needs a fixed reference point from which value can be gauged. A recession benefits — at most — a small minority of people while robbing wealth from society. BTC, as it matures, may present a solution to this problem and serve as a reference point for global financial markets. Where the gold standard once held sway, a digital equivalent may come to replace it.