Which Nation-State Will Be the First to Hold Bitcoin Reserves?
And what will happen when they do?
We all know that most governments hold some gold reserves somewhere stored in large, secure vaults and protected by scary men with guns.
But why exactly would governments do this? It’s not like these reserves are backing currency like they were even as recently as 50 years ago. It appears, on the face of it, to serve no purpose other than bling bragging rights.
Of course, there’s far more to it than that. Gold reserves are essentially backup assets that can be liquidated or exchanged in the event of some sort of economic disaster such as, for example, a sudden devaluation or loss of confidence in a sovereign currency.
Venezuela is a great example of this, where the recent collapse in confidence in its fiat currency, has forced it to sell off large swathes of its physical reserves on the international markets. But it’s not the first country to do this and it almost certainly won’t be the last.
Gold works extremely well in this context because it is one of the most valuable commodities on the planet with an incredibly well-established track record as a universally accepted store of value and medium of exchange. In short, there’s little doubt that in any sort of emergency, someone will be happy to take it off your hands and they would always pay on, or close to, market price.
Many countries also trade gold, buying it when it’s spot price lowers and selling it when it rises again. In many cases, the gold itself doesn’t move as it’s impractical and expensive to do so. Some even lend gold, with the interest being paid back in the same precious metal.
The gold industry is a fascinating place and unless something drastic happens, like the unexpected discovery of an enormous stockpile of gold instantly depressing prices, this is not likely to change anytime soon.
Countries have other types of reserve too
That said, countries don’t just rely on the yellow metal for peace of mind. Just as your investment broker will advise you to diversify your portfolio across different asset types in case of one or more failing, countries do as well.
In fact, many countries hold reserves not just of gold and other precious metals and commodities, but different currencies too. Some of this is stored physically in those same vaults, but more still is stored digitally in central banks around the world in the form of foreign exchange reserves.
The idea in all these cases is to hedge bets and have the best possible response to the worst-case scenarios, effectively allowing countries to continue trading as normally as possible and feeding its people not only in dire economic situations but also in the event of war or natural disaster.
Generally speaking, these reserves are enough to cover three to six months of imports and cover the country’s debt payments and current account deficits for twelve months. The dollar value of reserves that sit in various places around the world is therefore enormous.
Enter Bitcoin
Given the above, it would seem that Bitcoin would be a simple and ideal addition to the reserve mix. After all, it is (or more precisely is becoming) an excellent store of value and medium of exchange, it’s relatively easy to store with the right precautions, and has, potentially, the ability to be accepted universally by any government, organization or individual, and in any divisible amount anywhere at any time.
Also, since it operates on the world’s most secure decentralized computer network, there’s no chance of counterfeit Bitcoin entering the system and no expensive ‘purity verification’ required as there is with gold.
Transactions can be done on a trust-less basis directly which is perfect for countries who have complex relationships with their neighbors and, since no one country can ever hope to take full control of the Bitcoin network, the system of transferring ownership can never be bought into question.
Finally, although Bitcoin’s current speeds are too slow for microtransactions particularly in a retail environment, they are incredibly fast compared to complex international gold transactions that require a lot of third parties and expensive verification.
This means that almost ‘real-time’ transactions between countries can be facilitated on a level not yet seen in human history.
Imagine, for example, an instant transfer directly between two heads of state for whatever reason, done in real-time, instantly verified and involving no third parties whatsoever. Until now, this has not been possible.
But if all these things are true, then why haven’t we seen sovereign states hoarding as much Bitcoin as they can?
The problem of Bitcoin
The list of reasons against doing this at a sovereign level is vast and, to the governments concerned, seem insurmountable. The reality is, of course, that they aren’t, but until this is realized, progress will be slow.
The simple fact is that it is way too early in Bitcoin’s lifecycle for this sort of endorsement or recognition. There is little understanding of it at the government level, many countries still don’t really know what to do with it or even how to regulate it. There are also fears from powerful entrenched legacy financial systems that using Bitcoin would replace, rather than complement, those systems.
The advantages listed in the previous section are only proven on a relativity small scale and some of them remain borderline theoretical even in 2020. Adoption, application, and development may be happening fast, but we’re not there yet. Not by a long shot.
And, of course, there’s the ultimate slap in the face for the biggest countries — that they didn’t think of and develop it first at a national level. Many of these countries think they can create better and, whilst this may actually be possible from a technical point of view with a serious amount of focus and resource, I’d argue its adoption would be problematic.
Your allies might be OK with it, but your enemies won’t. A centralized system run by a powerful enemy who could freeze your money at a moment’s notice? No way. They will always prefer a decentralized alternative where no such power can be exerted by anyone at any time, such as is the case with Bitcoin.
And since everyone is both ally and enemy in a complex world, a trust-less decentralized solution is the only one that can really make the grade.
The simple accepted fact is that this is currently so far off the governmental radar it could be decades before there is any form of a sovereign reserve of Bitcoin.
But is that entirely true?
The first nations to store Bitcoin as a reserve
As we’ve seen, gold works very well as a reserve as much today as it has ever done, but there is an issue of control.
Venezuela’s recent sale of its gold reserves went against US sanctions, something that Turkey and the United Arab Emirates knew full well when they bought it. However, since around $1.2bn of Venezuela’s gold was held in the Bank of England’s vaults, President Nicolas Maduro’s attempts to withdraw it were, of course, blocked.
The rights and wrongs of both this act and the sanctions imposed in the first place can be argued indefinitely, but the point is that a secure supply of Bitcoin held in a cold storage facility in the country in question would render any sanction next to impossible to enforce. Had Venezuela had that option, it would not only have executed it, but it would have found no shortage of buyers on the open market.
This is almost certainly why Venezuela has tried, not successfully in my view, to create its own cryptocurrency — the Petro — and force its use and adoption around the country. It’s something that could, nevertheless, be seen as the first step in defiance or even for something bigger down the road.
My view, therefore, is that the first nations to create large Bitcoin reserves will be the ones that, if we’re honest, we’d rather didn’t.
Any country under international sanctions must, surely, have identified Bitcoin as a possible source or either reserve, income or money which is internationally redeemable without penalty or difficulty. Wherever there is internet access, Bitcoin can flow, regardless of what banks, governments or countries think about it.
The US, for example, currently (and ‘officially’) considers Cuba, Iran, Sudan, Syria, North Korea, Nicaragua, and Venezuela as ‘rogue states’, but many others could be considered to be so, even outside of the US definition.
These countries may have identified that they could leapfrog reserve values held by much larger countries by acquiring Bitcoin, either through clandestine government-sponsored mining operations or an outright purchase through innocent-looking agencies or even individuals.
Just two days ago, Coindesk, among others, reported that North Korea has almost certainly started down this route, with recently increased IP traffic in Monero (XMR) mining originating from the country, a currency that has two distinct advantages for a state that has such severe sanctions.
First, it does not require special hardware to mine such as the ASICs (Application Specific Integrated Circuits) needed for Bitcoin mining which it would almost certainly need to import and cannot do so. Second, it’s a highly anonymous currency that allows for almost invisible and secret transactions.
Once mined, it is also a simple process to convert to Bitcoin using any freely available wallet that has that capability.
If North Korea is already doing this, what will be the reaction of the rest of the world?
Since no-one can stop or control Bitcoin itself and stopping or controlling North Korea is just as difficult, that only leaves two possible courses of action:
EITHER do nothing and hope that Bitcoin and the other cryptocurrencies will go away or, at the very least, will be replaced with something that is more sanction friendly, OR, try and ensure you have more Bitcoin than your enemies do. After all, if Bitcoin works, you’ll have secure and valuable reserves and, if it doesn’t, the cost of failure is a fraction of your foreign exchange allocation anyway. The added bonus is that they’ll have nothing either.
Of course, the very act of buying up or mining and hoarding more Bitcoin than your enemies will actually drive up the price and give them more value on the back of your efforts, so even this solution isn’t without problems.
So what’s next?
We really don’t know what countries are doing what with Bitcoin behind the scenes, but we do know that governments are rarely truthful about what they say publicly. At the very least, it’s highly likely that there will be think tanks in place looking at the possibilities and the responses.
It’s also possible that some governments are experimenting with reserves along these lines and I wouldn’t be in the least bit surprised if small amounts are being held by government agencies to test systems of storage or simply to acquire slowly and unofficially ‘just in case’. After all, buying a few hundred coins would be easy to do under the radar and cost a tiny fraction of whichever government budget you want to hide it in.
In other words, it’s easy, the risk is low and a small budget that could secure a significant amount (in national terms), can be made available easily.
But however early we are in Bitcoin‘s existence, I am certain there will come a day, probably years from now, where sovereign states, possibly even world monetary organizations such as the IMF, race to secure their own reserves. They will do this either proactively through frugal monetary policy, or re-actively in fear of being left behind.
Either way, it will be fascinating to watch.
Published at Sat, 15 Feb 2020 11:04:11 +0000
