This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
On February 24, 2022 Russian troops crossed the border of Ukraine and began a pursuit to reclaim land it viewed as Russian territory. The aggressive move by Russia outraged almost everyone in Western countries as an unnecessary escalation of an already existing war which has cost the innocent lives of many on both sides. Among other actions, the United States government placed sanctions on numerous Kremlin elites, leaders, and oligarchs. These individuals lost access to assets through the unilateral action of the leaders of a collection of Western countries. Despite the sanctions, Russia’s war with Ukraine has persisted and there is no end in sight.
The United States has served as the global reserve currency since 1944 when 44 countries formally agreed to adopt the US dollar as the official reserve currency. At that time, the United States GDP represented a staggering 50 percent of the world’s economic output! By comparison, in 2022, the United States economic output represented 15.6 percent of the world’s GDP.
As a result of the US dollar being the reserve currency for almost a century, other countries have had a keen interest in the monetary policy of the United States as actions taken by the US Federal Reserve can have wide implications on other countries that hold the US dollar in their central bank. Many of the transactions between governments are conducted using the US dollar. This necessitates the central banks of the foreign governments holding US dollars to minimize exchange rate risks when buying and selling commodities and other goods with other countries.
Until recently the primary concern with countries who hold US dollars has been inflation risk. However, the thought process of non-Western countries has changed since sanctions were placed on Russia. Recently the BRICS bloc of countries (Brazil, Russia, India, China, and South Africa) expanded and admitted Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the United Arab Emirates in a move to attempt to diminish the control Western countries have over the world’s business, customs, and influence. These countries have not followed the Western countries lead on sanctioning Russia.
So how does any of this relate to bitcoin? Satoshi saw the need for a payment system that allowed for peer-to-peer transactions without the need for a trusted third party. While many may limit this to individuals, there are use cases as large as sovereign countries who may be tired of being attached to the influence of a third-party, in this case the United States. This is particularly true when you consider how much the United States’ influence has diminished in terms of GDP since the US dollar was adopted as the global reserve currency. This point is further amplified by the fact that, even prior to the BRICS expansion, the GDP of the BRICS nations already exceeded the GDP of the G7 (United States, Canada, the United Kingdom, Germany, France, Italy and Japan).
In fact, the BRICS countries have begun to explore the possibility of forming their own currency to settle trade among the participant members. While Bitcoin is highly unlikely to play a role in this currency as dictators hate censorship resistance technology even more than most Western leaders, some countries, like El Salvador, have already adopted Bitcoin. Bitcoin, which has known rules and is controlled by mathematics. Bitcoin could be an attractive alternative solution to the US dollar for democratic governments who no longer wish to rely on the economic policy the US Federal Reserves sets.
