The monetary system that has been ruling the world since the early 1970s seems to come to an end – what does this mean for Bitcoin?
Until 1971, the US dollar was backed by gold and all other major currencies were pegged to it for a fixed rate – a system that was conceived in 1944 in Bretton Woods. It was not a real gold standard like before World War I, as not everyone, but only central banks had the right to change their dollars for gold.
In the 1960s, the USA printed more and more dollars to fund the Vietnam War, so the system went out of balance. When central banks of other countries demanded to change their dollars for gold, the USA was running out of gold reserves. That is why President Nixon unilaterally cancelled the Bretton Woods agreement on August 15, 1971.
Since then, most currencies are not backed by anything and their exchange rates are free-floating. In order to keep the dominance of the US dollar, President Nixon made a smart agreement with Saudi Arabia. In exchange for military protection, the Saudis guaranteed to only accept US dollars for their oil.
All other members of the Organization of the Petroleum Exporting Countries (OPEC) followed Saudi Arabia’s example. This agreement made the US dollar the de-facto reserve currency of the world, as all nations needed US dollars to buy oil.
However, this so-called Petrodollar system seems to crumble now. Even before the Ukraine War, Russia and China had already agreed to trade oil for Chinese Yuan. Since the Western Allies imposed their sanctions, Russia has demanded to be paid in Rubles for its oil and gas.
In view of the Ukraine crisis, Russia and China are intensifying their bonds. They plan to extend the so-called BRICS alliance, named after its founding members Brazil, Russia, India, China and South Africa. Saudi Arabia is in negotiations to join this club of developing countries, which is becoming a powerful counterbalance to the G7 alliance of the Western industrial nations and Japan.
This move would be the final blow to the Petrodollar system, as Saudi Arabia would surely start accepting other currencies such as the Chinese Yuan as payment for its oil. It is very likely that the other OPEC members follow Saudi Arabia’s example again. This would undoubtedly be the end of the US dollar as the world’s currency.
What does this mean for Bitcoin? Could Bitcoin replace the dollar as the main currency for world trade? An important point for this scenario is Bitcoin’s neutrality. The BRICS members will probably find it hard to agree on any of their national currencies as the dominating one.
The BRICS countries differ significantly in their political systems and values, so I doubt that they would let anyone dominate their alliance like the USA dominated the world since the end of World War I. Furthermore, although Western powers like the USA, Britain, Germany or Japan will not be as dominant in the world as before, they will still have a weighty voice. They would definitely not accept the Yuan, the Ruble or the Rupee as the world’s currency.
Bitcoin could be the one currency that everyone agrees on, as it is not controlled by any single nation. The problem is Bitcoin’s high volatility, which makes it hard to use for trading goods. So rather than denominating the price of oil in Bitcoin directly, a Bitcoin-backed stablecoin such as the Dollar-on-Chain (DOC) could take over this role.
Unlike stablecoins such as Tether or USDC that are allegedly backed by US dollars on bank accounts, the Dollar-on-Chain gets its stability from an algorithm and is 100% backed by Bitcoin, as we have explained in this article. The US dollar is only used as a reference, no dollars can be found anywhere in the DOC system.
Wouldn’t it be an irony of history, if a Bitcoin-backed stablecoin pegged to the former world currency becomes the new one?
By Aaron Koenig