How will bitcoin change the global financial system and international relations?

Internet is about sharing, Bitcoin is about ownership

Bitcoin was born in the heart of the internet, on discussion forums between cypherpunks who had been looking for a way to exchange monetary value without going through a third party for decades[1]. Indeed, a 4-page PDF entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" was published by Satoshi Nakamoto on October 31, 2008 on bitcoin.org and sent the next day to the entire Cryptography Mailing List. On January 3, 2009 the first stone of the network was laid: the genesis block. It contains an eloquent message which is none other than the front page of the Times of the day: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". What Bitcoin is revolutionizing with its blockchain technology is the ownership. It allows one to truly own one's money in the sense that only the holder of the private keys of a wallet can decide on the use of the funds it contains, and nobody else. This, without the intervention of a third-party government or bank.

? The internet of Money ? as Andreas M. Antonopoulos[2] calls it[3], quickly became the money of internet. It’s interesting to note that if the internet promises to abolish the borders between people, its use and access remain subject to the decision of states. Bitcoin was born in the heart of the internet, so it makes sense that the only borders it knows are those of the internet, although it has already emancipated itself from it thanks to companies like Blockstream that send network nodes into satellite orbit[4]. States cannot prevent its use. While states still have some control over the borders of the international financial world, they cannot control (and prevent) the financial flows of the Bitcoin network.

One example is Iran, where Bitcoin is a way to stay financially connected to the rest of the world despite US sanctions that have gone so far as to disconnect[5] the country from the SWIFT network (an interbank communication network linking over 11,000 banks around the world). The Central Bank of Iran recently announced[6] that banks and licensed money changers can now use cryptocurrencies mined by miners approved by the Iranian authorities to pay for imports into the country. This is part of a strategy of the Iranian government that has been unfolding since 2018 and proves that certain states have an interest in participating in the project of a truly global currency that is Bitcoin, as it’s stateless. Plus, according to a report from the Iranian Presidential Center for Strategic Studies, a thinktank attached to President Rouhani’s office, "if large mining farms are established, the need to employ manpower for monitoring and repair, security, electrical engineers and technical staff related to hardware and software equipment will increase, which leads to more job opportunities in other sectors."[7] The report note that $22 millions a year would be earned by the Iranian state thanks to bitcoin’s transactions fees revenue, adding that $700 millions a year could be generated by direct revenue from cryptocurrencies.

Gold too is a stateless asset. This is one of the very many characteristics that gold and Bitcoin have in common[8]. One of them is scarcity, except that Bitcoin is scarcer than gold if one refers to the stock-to-flow ratio[9]. Indeed, in contrary of gold, bitcoin’s available stock cannot be modified (slowed down or accelerated) according to the goodwill of the States, the mining companies or anybody. If we can estimate the amount of gold that remains to be extracted, we are not immune to discovering a new mine in the years to come, or to bringing gold back to Earth from space[10]. The gold supply is limited but not strictly limited. In contrast, we are certain that there will never be more than 21 million Bitcoins. Bitcoin gathers every attribute that gold gathered to be a store of value and is increasingly recognized as such since the last halving in May 2020. Precisely at that time, it was Paul Tudor Jones who was the first big name on Wall Street to recognize Bitcoin's utility as a store of value through an investment advice letter to his investors entitled "The Great Monetary Inflation"[11]. He probably convinced Michael Saylor, the CEO of MicroStrategy, who decided to invest more than 60% of his company's (NASDAQ listed) cash in Bitcoin. Saylor then organized a series of conferences for business leaders around the world to explain why and how to follow his example[12]. Shortly afterwards, Elon Musk announced that he would convert 8% of Tesla's cash into Bitcoins. As a business leader, Musk is an example for many, so many companies followed his example. By the way, that explained those past days downtrend on Bitcoin’s value: Musk have been generating fear, uncertainty, and doubt (FUD) on the market by tackling bitcoin’s energy consumption. We’ll discuss it later.

What Bitcoin offers is an entire monetary ecosystem

The network consists of an engine (Bitcoin Core) and a ledger (the blockchain). It operates in a decentralized way thanks to "miners" who run nodes (computers) 24/7 to participate in the validation of the network and earn bitcoins in exchange for their work ("Proof of Work"). The rate at which bitcoin is mined is determined by Bitcoin Core and cannot be changed: it is halved every 4 years during halving. In addition, Bitcoin Core is programmed so that miners validate a block every 10 minutes on average. If the number of nodes increases, the power of the network also increases, and thus the average block validation time decreases, but Bitcoin then automatically adjusts the difficulty of mining[13] to prevent miners from validating blocks too quickly (every 2016 blocks, or 15 days). The same applies to the transaction fees that the network takes, which are adjusted according to the network's congestion. By comparison with the traditional monetary system, Bitcoin would at the same time central banks, commercial banks and their branches, ATMs, electronic payment terminals, and the entire information transfer architecture between these entities. Bitcoin is as transparent with respect to the rules that govern its operation (Bitcoin Core is open source) as it is with respect to the exchanges it enables[14]. Last but not least, it is freely available to all[15].

Covid19 has plunged the world into a bewildering economic slump. Lockdowns are persisting, travel restrictions are being imposed, many industries are shutting down, others are experiencing supply chain slowdowns, and others are facing shortages. Central banks have decided to save the economy at any cost. To do this, they have allowed borrowing at negative rates on the one hand, while buying up government debt and stock market securities on the other. But the expansion of the money supply in the financial markets seems to be out of control and is announced as having no limit if we believe the presidents of the FED and the ECB.

More and more countries are beginning to challenge these policies, the outcome of which is uncertain. Some fear the effects of probable hyperinflation, others criticize the weight of the dollar in the current financial system. The dollar still accounts for more than 80% of the world's financial trade, even though the United States' share of international trade has been steadily declining in recent years. It is no longer the largest contributor to world trade. The Covid crisis has accelerated the trends that were already underway: a decline in American power in the face of the rise of Chinese power. For these reasons, among others, the return to the gold standard is a subject that is resurfacing more and more regularly on the international scene thanks to actors such as Russia, Turkey and China (and more broadly the BRICS but not only). Russia, for example, began a process of de-dollarization of its economy last year by selling 96% of its dollar reserves[16] and reducing the share of exports sold in US currency below 50% (a historic first) in favor of the euro[17]. "International trade needs a new international monetary system whereby no country will have the power to freeze the international assets of another country." said the Chairman of the Shanghai Gold Exchange[18] last year. In fact, since 2008, China has increased its gold stocks by +224%. Russia increades it by +474%.

The problem is that gold is increasingly criticized. Its extraction is very polluting, its traceability is problematic, it can be falsified[19], voices are raised to question the reality of the stocks held by central banks by suggesting that there is most likely much more paper gold than physical gold... and above all, it is not practical to trade gold. Transaction costs are extremely high (time, risk, security) and gold does not allow for very precise value exchanges. Bitcoin, on the other hand, allows for the exchange of more than 1 billion dollars in less than an hour and for $0.73 in transaction fees[20] with a greater degree of precision than the dollar allows. The strong influence of the Austrian school of economics in the minds of Bitcoin's creators and ambassadors can’t be ignored: they advocate free competition between currencies and the possibility for the citizen to use more than one, according to his preferences. But if we look at the definition of sound money, Bitcoin seems to be the best now, better than gold.

If the world were to switch to a "Bitcoin standard" system as proposed by Saifedean Ammous[21], there is no country that has more to lose than the United States: beyond the status of the dollar as an international reserve currency, it is the extraterritoriality of US law that is threatened[22], or at least its scope. Especially since China is already far ahead of the United States in blockchain technology, but also in Bitcoin and, more broadly, in the technology war[23]. From now on, the only defense that the United States can adopt is participating to the digital gold rush, as defended by the co-founder of PayPal, Peter Thiel[24], or the Republican’s leader[25]. In fact, the U.S. Office of Intelligence has already anticipated these profound changes, publicly since February 2020[26]: ? The U.S. should prepare for scenarios that threaten to undermine the U.S. dollar as the world reserve currency and determine how those scenarios could be overcome, protecting our status in the global economy. The U.S. should prepare to identify potential “black swan” events that could revolutionize the financial playing field in ways we do not yet understand – presenting strategic surprise -- and understand root causes and driving factors that are particularly sensitive to certain global or technical events. ?

The planets seem to be perfectly aligned to see a situation where the SWIFT network would eventually be replaced by the Lightning Network of Bitcoin (although we are still far from it, this scenario is becoming more and more plausible):

• SWIFT is increasingly criticized due to costs and slowness (due to the numerous intermediaries) but also centralization of power in the hands of the United States. Above all it is increasingly challenged: in 2014, Russia created its own SWIFT, the System for the Transfer of Financial Messages (SFPS) and in 2015, China followed suit and created the Cross-border Interbank Payment System (CIPS), which Russia joined in 2019 (with the expectation that China will follow suit with its SFPS). Plus, China has already a lot of advance with its digital yuan[27].

• Since 2020, many banks around the world have been authorized to host public blockchain nodes and manipulates cryptocurrencies. This has allowed banks to step in the Bitcoin ecosystem: starting in the one hand to offer conservations solutions for them customers and in the other hand participate to the Bitcoin’s network (mining). From Germany that allows its banks to store and sell cryptocurrencies since early 2020[28] to USA since January 2021[29] that followed up. I.e., Donner & Reuschel, the oldest German bank, will soon offer such services to its customer, and planned to go further by "intensively address" tokenization of assets to maximize its chances of benefitting from an anticipated shift in the finance industry[30]. Plus, Germany authorities succeeded to create bridge between blockchain and euro by launching a stablecoin backed by euro. In USA, it’s interesting to note that while traditional banks are moving into Bitcoin (Morgan Stanley[31], Goldman Sachs[32], Citibank[33], and so on…), the biggest US crypto exchanges are becoming legit banks (Kraken has been the first[34] but there’s no doubt Coinbase will follow as they incredibly succeeded them direct listing on Wall Street[35], surpassing several traditional banks capitalization). Plus, thanks to New York Digital Investment Group and Fidelity Assets Management, hundreds of US banks will be able to offer direct access to Bitcoin to them customers[36].
• In the meantime, Bitcoin continues to progress as Taproot upgrade promise many major improvements[37]: reducing amount of data to be transferred and stored on the blockchain, allowing more transactions per block (higher TPS rate), reducing transaction fees, improving privacy, and finally improving network security. Plus, the number of Lightning Network nodes never stop increasing since its creation (more than 11k nodes are now active[38]): Lightning Network (LN) is a second blockchain layer that allows to drastically reduce transaction costs while unlocking almost instant transactions (it usually takes an hour for a common bitcoin’s transaction to be validated). The go is to allow Bitcoin to scale up like never. Just like SWIFT connect almost every bank around the world together, they can now connect to each other by hosting a LN node, considerably improving them exchange efficiency.

So why can we talk about a digital gold rush?

Because of every reason above more and more States are anticipating that Bitcoin could become an essential resource:

• Source of monetary autonomy: bypassing US sanctions, emancipating itself from the dollar, being able to decide on its commercial partners freely, protecting its national currency against hyperinflation.
• Source of revenue: sale of BTC, taxation of BTC miners -China has understood this for more than 4 years already-, increase of taxes collected thanks to the increase of jobs created by the industry that develops around it.
• Source of regional and international power: as the stock of BTC is limited, owning more of it than its neighbors’ states -allies or enemies- gives a certain power on the market that they don't have. Plus being able to attract foreign players -with attractive regulation and/or low electricity prices-.

If tomorrow Bitcoin becomes a reference currency for all other national currencies (the famous Bitcoin Standard) as gold was in the past, it will be crucial for states to own a certain amount of it to establish their power. Indeed, as a recent report from Citigroup notes[39], “the advantage of Bitcoin in global payments, including its decentralized design, lack of foreign exchange exposure, fast (and potentially cheaper) money movements, secure payment channels, and traceability. These attributes combined with Bitcoin’s global reach and neutrality could spur it to become the currency of choice for international trade.”

That is said, you should not forget that the United States alone owns more than 25% of the world's central banks gold stock[40]. But as most of the US major banks recognize few weeks ago[41] followed by the Bank of Singapore[42]: Bitcoin is displacing gold as an inflation hedge[43]. Indeed, gold loses almost 20% of its value between August 2020 and March 2021 while Bitcoin’s value increased by 475% during the same period. It is certain that if gold loses its interest as a store of value in comparison to Bitcoin in the coming years, while it has already, since 1973, lost its value as an international monetary standard (which bitcoin may eventually gain over the next 10 years), the US will do everything they can to try to gain as much control over bitcoin as possible.

China is leading the race

But the moment they do not have the lead:

• China hosts about 65% of the network's computing power.
• China hosts the leaders of the mining industry (the big ASIC manufacturers like Bitmain and the biggest mining pools).
• Asia in general has been more crypto oriented than the US for a long time (even if recent moves by US institutions tend to repatriate on US soil a significant part of the crypto’s supply -Bitcoin, and others-).

The key to the production of Bitcoin is the price of electricity: miners are looking for the cheapest electricity to ensure comfortable rentability, and they’re not afraid to move in and out from a country to save their rentability. Therefore, countries are competing on the basis of their electricity price per kWh and their legal framework. Electricity in China costs 2 to 3 times less than in the US. 80% of Chinese mining energy comes from green energies (even if renewable energies represent less than 20% of the Chinese energy mix) and miners have agreements with energy producers (mainly dams) who are in surplus to buy their excess production (sometimes at a reduced price). Indeed, a third of the worldwide electricity produced is wasted as we are still not able to stock electricity. Almost every dam is overproducing and so losing electricity. In this case, bitcoin miners appear to be a win-win solution that allows to hydro producer (and others renewable energy producer) to be more valuable and reach return on investment earlier. With this in mind Bitcoin could be seen as an incitation to increase the part of renewable energy in the energy mix of countries by reducing the costs of energy shift. Plus, the last report from Galaxy Digital[44] noticed that banking system is consuming two times more energy than Bitcoin’s network, so as gold industry.

The entry of the United States into the race is very recent. What is clear is that Bitcoin mining is moving enormously over the years[45] and the geopolitical stakes involved are very high. The Chinese players themselves are increasingly exporting to Canada or the US or others like Singapore for some. Halving and what it imposes in terms of production profitability is not innocent in the rhythm of miners' movements either. Plus, the Nordic countries also historically host a large proportion of miners (Canada, Norway, Iceland, Russia, etc.) for evident reason of cheap cooling of mining farm. But Asia is clearly at the forefront of the blockchain race, and the USA is totally behind this region (China being the country that has the most integrated the BC in the functioning of the state and its economy) the Asian dragons are at the forefront of the development of BC protocols and solutions but especially of the integration of this one in the traditional economy. The USA is clearly not behind the rest of the world, but it is between 2 and 4 years behind the Asian market now.

Blockchain Race is the new Space Race

The ongoing economic war between China and the US hides a technological race for the domination of the future international monetary and financial system. However, Bitcoin may end up being a common ground between the major powers, including all developing countries that have everything to gain from integrating a hard currency into their economic system. It is too early to jump to conclusions, but Elon Musk's latest stance should not blind us to the fact that the issues surrounding bitcoin go far beyond Elon Musk and Tesla's interests. Just as Bitcoin doesn't care about opinions, it doesn't care about state positions: like it or not, it will always be supported by a part of the world's population (countries included) and this is where its decentralization is its greatest strength.

[1] https://danheld.substack.com/p/the-final-boss-bitcoin-vs-central

[2] Andreas M. Antonopoulos is one of the very first popularizers of Bitcoin, promoting it since 2012

[3] https://www.youtube.com/watch?v=rc744Z9IjhY : “Introduction to the Internet of Money” Andreas M. Antonopoulos

[4] https://cointelegraph.com/news/bitcoin-in-space-blockstreams-satellite-network-now-25x-faster

[5] https://studies.aljazeera.net/en/reports/2018/12/uss-iran-sanctions-mixed-prospects-swift-question-181227093552371.html

[6] https://financialtribune.com/articles/business-and-markets/108313/banks-and-forex-shops-can-use-digital-assets-to-pay-for-imports

[7] https://iranwire.com/en/features/9084

[8] https://steemit.com/bitcoin/@reaper/will-bitcoin-become-a-sustainable-alternative-to-gold-as-a-store-of-value

[9] https://medium.com/@100trillionUSD/bitcoin-stock-to-flow-cross-asset-model-50d260feed12

[10] https://www.bbc.co.uk/newsround/51858259

[11] https://idxinsights.com/paul-tudor-jones-may-2020-letter-to-investors/

[12] https://www.youtube.com/watch?v=pX76yXk0cT0

[13] https://www.bitpanda.com/academy/en/lessons/what-does-mining-difficulty-mean/

[14] https://www.blockchain.com/

[15] https://www.bitaddress.org/

[16] https://www.rt.com/business/488928-russia-dumps-us-dollar-debt/#:~:text=Russia%20%26%20FSU-,Dump%20the%20dollar%3A%20Russia%20has%20now%20gotten%20rid%20of%20over,of%20its%20US%20debt%20holdings&text=Moscow%20has%20continued%20to%20sell,US%20Department%20of%20the%20Treasury

[17] https://www.bloomberg.com/news/articles/2021-04-26/russia-ditches-the-dollar-in-more-than-half-of-its-exports

[18] https://www.reuters.com/article/us-china-gold-currency-idUSKCN22A1FY

[19] https://www.bloomberg.com/news/articles/2020-07-15/chinese-jewelry-maker-probed-for-using-fake-gold-bars-for-loans

[20] https://www.blockchain.com/btc/tx/b36bced99cc459506ad2b3af6990920b12f6dc84f9c7ed0dd2c3703f94a4b692

[21] https://saifedean.com/thebitcoinstandard/

[22] https://peakd.com/fr/@faucheur/les-crypto-actifs-une-menace-pour-la-suprematie-du-dollar-et-l-extraterritorialite-du-droit-americain-par-marius-campos-partie-1

[23] https://cointelegraph.com/news/us-is-losing-tech-cold-war-with-china-says-ripple-co-founder

[24] https://www.coindesk.com/peter-thiel-china-weaponizing-bitcoin-politics

[25] https://www.forbes.com/sites/jasonbrett/2021/04/14/republican-house-leader-doubles-down-on-bitcoin-as-counter-to-china/

[26] https://www.zintellect.com/Opportunity/Details/ICPD-2020-02

[27] https://www.cnbc.com/2021/05/10/china-digital-yuan-alibabas-ant-joins-e-cny-currency-trial.html

[28] https://news.bitcoin.com/german-banks-authorized-to-store-and-sell-cryptocurrency-in-2020/

[29] https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html

[30] https://www.coindesk.com/german-private-bank-to-offer-crypto-services

[31] https://www.cnbc.com/2021/03/17/bitcoin-morgan-stanley-is-the-first-big-us-bank-to-offer-wealthy-clients-access-to-bitcoin-funds.html

[32] https://www.cnbc.com/2021/03/31/bitcoin-goldman-is-close-to-offering-bitcoin-to-its-richest-clients.html

[33] https://www.ft.com/content/d90ed3bf-2c8d-46c9-98b7-67859f6598e5

[34] https://www.coindesk.com/kraken-crypto-exchange-secures-bank-charter-under-wyoming-law

[35] https://edition.cnn.com/2021/04/15/investing/premarket-stocks-trading/index.html

[36] https://www.cnbc.com/2021/05/05/bitcoin-is-coming-to-hundreds-of-us-banks-says-crypto-firm-nydig-.html

[37] https://decrypt.co/70598/what-is-taproot-proposed-bitcoin-upgrade

[38] https://bitcoinvisuals.com/ln-nodes

[39] https://www.citivelocity.com/citigps/bitcoin/

[40] https://www.usfunds.com/investor-library/frank-talk-a-ceo-blog-by-frank-holmes/top-10-countries-with-largest-gold-reserves/

[41] https://cointelegraph.com/news/bitcoin-will-eat-gold-s-market-share-according-to-jpmorgan

[42] https://www.independent.co.uk/life-style/gadgets-and-tech/bitcoin-gold-cryptocurrency-singapore-b1793313.html

[43] https://www.bloomberg.com/opinion/articles/2021-04-09/bitcoin-is-displacing-gold-as-an-inflation-hedge

[44] https://beincrypto.com/galaxy-digital-bitcoin-consumes-less-energy-banking-gold/

[45] https://cbeci.org/mining_map