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We often read articles and interviews attacking China's policies of financial expansion and a change of the regional and global geopolitical balance to its favor. We also have many examples of government-issued national currencies (fiat) failing. Increased inflation or hyperinflation is a result of weak government decisions or economic sanctions waged against these economies. The Chinese Yuan, on one hand, is a threat to the dollar hegemony, and the national currencies of countries like Venezuela, Iran, Zimbabwe, Lebanon, and Turkey are the result of mismanagement, corruption, and centralized system failures.
The global finances are changing as technology rapidly increases. We have entered a new era of what is called the Fourth Industrial Revolution. This, is the beginning of a new era of progress and many concepts that we always thought being science fiction are now gaining traction. There will be opportunities and threats, but mostly a major change in how the whole world operates and, of course, how money moves around the globe. It is money that made the world we have today, and while the control of resources and production is what matters most, we still have to agree there is no perfect money management system yet.
Cryptocurrencies for a decade now are challenging traditional finances. Decentralized networks, autonomous and immutable, with consensus decision progress, are trying to become better solutions for the future of finance. Governments are subject to lobbying, manipulation, and extortion by interests inside and outside of a country. Governance is becoming a very complex mechanism of bureaucracy and centralized decision process, that has to take for a fact that all the data is correct and untampered. Meanwhile, the reduction of corruption requires a transparent mechanism of payments.
There is a need for trust in governments, and the concept that government must control the flow of money through central banks is now outdated. The control of money by the banks is the reason for most of the financial disasters of history. This is why separation of money and the State is of utmost importance. Cryptocurrencies are offering a new system for money governance, separated from the state, autonomous, transparent, verifiable, immutable, and efficient.
The fourth industrial revolution that just started with 5G networks and increased connectivity, Artificial Intelligence, IoT, advanced robotics, augmented reality, brainwave reading devices, biotechnology, and many more advancements, will completely transform the world, and most importantly our presence in this world.
Bitcoin has grown today to a one trillion industry. The whole crypto market is valued at two trillion dollars. However, it can all as easily drop again and vanish from the mainstream for two or three years until perhaps the next halving. Bitcoin is a very speculative asset and is also stripped from the initial vision of being a currency. It could be that Bitcoin will stay ahead of the competition for the foreseeable future, but it will not be used by the population for practical reasons, as daily payments and small transactions.
The fourth industrial revolution requires a better currency from both fiat and Bitcoin. A faster one and cheap in the terms of the transaction cost. Bitcoin Cash is the adaptation of Bitcoin that achieved this. More cryptocurrencies are trying to scale, while not having to decrease decentralization and security.
Governments will require a decentralized cryptocurrency for reasons of transparency, or reasons of privacy. Different ones are covering both aspects. Monero and ZCash for example are not a threat for governments, but a tool that will allow the implementation of some of their plans.
In the next two decades, we will witness rapid changes. Some financial analysts are discussing concepts like the great reset, and the greatest transfer of wealth in history. We can't deny there will be increased competition and cryptocurrencies will be a weapon in financial arsenals.
In previous posts, I often describe what happened with Bitcoin and why Bitcoin Cash and other cryptocurrencies are better solutions as means of payment. It wasn't because the Bitcoin community decided that, but just a small part of the developers driven by Blockstream.
The foundations to control Bitcoin are already set to be under the control of Central Banks. A power struggle inside Bitcoin will be unavoidable as it keeps expanding. Governments with the use of Central Banks and private banks will compete in controlling every aspect of Bitcoin possible.
China is on course to become the top economy. Also, the geopolitical influence of China has been increased. It is already a more significant power in areas of Asia and Africa where the US had been historically dominant.
Belt and Road is the plan for China to increase exports through well-organized and modern channels of distribution. It is a huge logistics infrastructure under development that will accommodate the Chinese exports through roads, bridges, ports, and airports.
The "belt and road initiative" while it will be a growth instrument for all those that cooperate, it will also create an increasing political and economic influence of China in these regions. The investments China has allocated in Central Asian countries like Pakistan and Afghanistan are significant and it is also a major lender to most developing countries.
Belt and Road (Wikipedia)
This plan is going to boost China's economy and bring it closer to its target to become the first economy in the world in terms of GDP. But the main problem in achieving this, it could be the dollar. China would not want all this network to settle in dollars. Maybe not even in Yuan Renminbi.
China is on course to becoming the number-one economy and this has escalated with the effect of the covid pandemic.
The Chinese economy is projected to take over around 2028, and perhaps as early as 2026, in case the Yuan strengthens further to the dollar.
China controls the vast majority of new Bitcoins production and around 60% of the hash rate that is the most important factor, together with nodes, for the decentralization of the network.
While the Chinese government doesn't control the mining, and it is done by private companies, it is still not in its interests to control it directly or even attack it.
Under the worst scenario possible, the Chinese government could takeover all mining facilities and perform a 51% attack on Bitcoin. It can just takeover all mining facilities at once and execute this plan. China never appeared to be pro-Bitcoin, and a good example is the blanket ban on cryptocurrencies in 2017.
Since anything like that will probably damage Bitcoin permanently the Chinese government will probably never try it. There are many reasons, one being the profit from the Bitcoin mining industry for the Chinese economy, as except the new coins, there is the profit from mining equipment sales coming from Chinese ASIC hardware producers. China is practical and will not harm a profitable industry unless there is some great concern, maybe political, financial, or environmental.
It is unknown how many Bitcoins China is holding right now. In 2019 it was announced that the Chinese Authorities after major operations managed to crack down the PlusToken Ponzi network and "seized" 194,775 BTC, 833,083 ETH, and a large number of other cryptocurrencies. The total value of these coins today is close to 20 Billion dollars. No report followed about the whereabouts of these coins and probably China will not auction or sell them, but hold and evaluate again later.
A very interesting case for Bitcoin that lately came to fruition is the use of Bitcoin by governments to avoid trade restrictions, embargoes, and sanctions. Some of the main players in possible future crypto wargames are these candidates:
Pakistan and more
I will only cover extensively USA and Venezuela. China was discussed in the previous chapter and I think that the USA and Venezuela are the ones we should focus on, but for different reasons. The US is the main economy right now, and the one that will battle for dominance versus China in this and the coming decades. It will be a fierce financial war, just like what we have seen with the Trump administration, yet China will be seen retaliating, each time with more options available.
Can anyone think that the US government will in any way allow the dollar to be replaced by anything else? We think it is impossible for the US economy to get into big trouble, but we should always consider how empires fell throughout history. It was always from the inside, often when the national currency devaluated to nothing, following an overextended social welfare system that created an unproductive and nepotic state, and a budget that was above the means of the economy for decades, or even hundreds of years.
The Roman Empire fell because of financial mismanagement. The creative finances of Roman economists gave resulted in hyperinflation and a fractured economy that was the demise of the Roman Empire. What happened was similar to what we see today happening in the United States. The dollar has been losing value like never before since the 2008 financial meltdown. The attitude of the Central Banks like the FED, or its European counterpart, is to increase government spending, increase taxation, increase money supply, and risk of high inflation that we haven't seen since the 80s.
Another indicator that can become a big problem for the United States is the high debt and the government bonds offered at very low interest. Investors are flocking money in the government bonds for decades. The US national debt has passed 28 trillion dollars, while the country's deficit reached 130% in 2021.
The economic outlook is frightening, and it seems to be in an unexplored territory for the US. However, we have another similar example from history, the Roman Empire.
There is no data released on the amount of BTC or any other cryptocurrency owned by the US government. Last year we read about the transfer of 69,369 BTC that belonged to Silk Road and "seized" by the FBI. Previously the US government had auctioned more than 144,000 Bitcoins, again "seized" from the Silk Road wallets probably after Ulbricht handed over the private keys.
There is possibly more US state-owned Bitcoin, however this time it seems the government may reconsider any decision to auction cryptocurrency assets.
While the current financial system is dominated by the dollar, in a few decades cryptocurrencies may be the new norm. And maybe those governments that hold in their balances large portions of Bitcoin, Bitcoin Cash, Ethereum, and a few more cryptocurrencies will have the upper hand on making financial decisions.
It is also expected that while the USA is trying to regulate, these regulations will keep reducing innovation and aiming to control the use of cryptocurrencies in the country. The plans have to do with custodial wallets, strict KYC/AML, and complete state control of transactions. This is already happening with the controlling position of the US government on crypto exchanges like Coinbase, Kraken, Bittrex, Gemini, and others. These are registered financial institutions in the USA and have to follow rules and regulations, while often we read about financial authorities and criminal investigations asking for users' private data from these exchanges.
Politicians inside the US government have been showing a growing interest in cryptocurrencies. Mostly they are trying to integrate crypto in the financial system but in a sense of using them as financial assets that may be new and promisting but still in a crude state. United States is the land of opportunity and allows cryptocurrencies to flourish, but in return, it asks for some way of controlling them.
Cryptocurrencies are used widely in Venezuela because of the demise of the Bolivar and the destruction of the Venezuelan economy, by a decades-long confrontation with the USA, the UK, Spain, and other economies, having started from the days Hugo Chavez was voted President.
For a while, Venezuela was enjoying high numbers of development during the Chavez era, but after his passing and succession by Maduro, the Venezuelan economy collapsed, with the Bolivar's hyperinflation accelerated to extreme levels leading to the demise of this fiat currency. The fiat currency of Venezuela (Bolivar) is practically done for and under the current government, it will not recover easily. The US-led trade embargo versus Venezuela was enforced due to Chavez's nationalization of private companies of US interests. Maduro's new plans for a more centralized and controlled economy were even closer to a communist system.
Venezuelan citizens are offloading the fiat currency and try to acquire "store of value" assets that are US dollars, gold, and cryptocurrencies.
Initially, cryptocurrencies were not very attractive to Venezuelans. It was just a small part that was using them, maybe not even 1% until 2018, but two years later the practicality of using cryptocurrencies instead of the completely useless Bolivar fiat currency was obvious. It became obvious to the government of Venezuela too and a possible solution to many of its problems.
The Venezuelan economy wasn't able to handle high social welfare expenditure and the result inside the country was demonstrations, riots, and coup attempts. Most were dealt with brutality by the state authorities as police and the army kept being loyal to the Maduro government.
Equally big problems are outside of the country. Financial restrictions, seizure of international assets, as tankers and gold reserves, and an embargo enforced by the US government, as well as sanctions against government officials and even arrest warrants for high profile politicians and Maduro himself.
When reaching for solutions to bypass the trade restrictions and offer a better currency to the population that would not be junk, the government turned to cryptocurrency. The creation of Petro and the initial distribution to every Venezuelan in state-controlled digital wallets was a decisive moment. Petro is state-backed by the government of Venezuela, supposedly backed by national resources like gold and oil. However, there is very little information available and this state-run cryptocurrency is probably centralized and having unlimited supply. The Venezuelan president announced recently, that 2021 will be the year of revival for Petro and a boost of its usage inside the state.
The revival of the use of petro, of all cryptocurrency systems, the use of blockchain technologies, the development of the Patria system, and the generation of new applications will set the tone for 2021.
From the few reports we have, it seems that Petro is not suffering from extreme inflation and could become a way to counter the problems of the Bolivar.
Venezuela decided in 2020 to begin operations for Bitcoin mining, create a national pool where all miners should register and officially recognized Bitcoin as a government treasury asset.
Venezuela mines Bitcoin and other cryptocurrencies and also uses them for international trade to fend off US Sanctions. There are no numbers available but reports state that the Venezuelan government was looking to create reserves in Bitcoin and Ethereum.
Venezuela is working within the cryptocurrency world
Peter Thiel, a billionaire and self-proclaimed Bitcoin maximalist, has recently called Bitcoin a Chinese Financial Weapon. As a fiat currency fierce competition is intensifying Peter Thiel starts thinking of Bitcoin becoming a weapon used by China against fiat currencies other than the Yuan, and especially used to weaken the dollar.
Thiel says at a point that the Chinese don't want the renminbi (another name for Chinese Yuan) to become a reserve currency.
What I think Peter Thiel knows, is that it is not just Bitcoin that will become a financial weapon. Possibly there will be better solutions to ease many financial problems. But for the time being, it is Bitcoin and all these weird discussions are coming at a time when usually Bitcoin is at a very high market valuation.
The fact is that China doesn't like the dollar being a reserve currency and think-tanks in the US and Europe are expecting China to make every effort to undermine the dollar hegemony and try to replace it, possibly with the Yuan. However this is an argument challenged by many analysts recently. Thiel, is explaining the latest thoughts on China's intentions, which follows his argument, that the Yuan is not ready to become a reserve currency and challenge the dollar right now, and perhaps not even for the next twenty years.
He argues that China may be accumulating and increasing Bitcoin deposits, and wants to replace the dollar with Bitcoin instead of the Yuan. It certainly doesn't want the dollar and wants to break out of what it sees as an iron grip over the global financial system.
Bitcoin becomes weaponized, just by China accepting it instead of the dollar for international trade. Bitcoin is the most popular for the time being. It can be used as a settlement for large transactions, and it has been used for that by Venezuela, in trades with Turkey and Iran (source).
"The Trump administration has been unabashed in its weaponization of the U.S. dollar to get what it wants."
-The Washington Post
The displacement of the dollar could serve the Chinese interests, especially with the creation of the "Belt and Road Initiative" and cryptocurrencies could be used to undermine the dollar even further. For the time being Bitcoin is the most popular cryptocurrency, it is having large hedge funds backing it and has reached a trillion-dollar market cap. While those of us that are in crypto for a long time, we know that Bitcoin is following programmed price cycles and prices will start going down again with perfect symmetry with previous cycles, we still admit that for the time being Bitcoin is a respected asset by big funds.
I still don't think that Bitcoin will ever be used as a means of payment serving the people, but it can have another utility, for a limited time, which could be this one.
Cryptocurrencies can be used to avoid sanctions and Venezuela has already been doing that. Iran is also having plans to create a digital currency strategy that involves Bitcoin mining, as well as Venezuela and Pakistan. North Korea is accumulating cryptocurrencies, with reports of hacking teams from the country attacking foreign exchanges, usually South Korean ones. Most of these countries are long-time rivals to the USA. North Korea, Iran, and Venezuela are considered failed states and constitute a modern axis of evil for the US. Even Pakistan is lately looking to be moving away from the traditionally good relations with the United States since 2018.
For these governments, cryptocurrency may be a way out of their financial struggle as the use of crypto will help them alleviate the problems created by long-term sanctions against them and mishandling of the economy. Bitcoin is weaponized in these cases in a way, as it makes international sanctions obsolete. More like a shield that will create immunity for these governments.
It is still very early and this is just theoretical as for the time being Bitcoin is still not able to be used on a large scale. Bitcoin can be a financial weapon. Another cryptocurrency can also be in Bitcoin's place, however, the currency wars will be fought for fiat dominance. If Bitcoin or another cryptocurrency gets involved it will be temporary.
Cryptocurrencies are usually discussed behind closed doors at very high government and business cycles especially after Tesla purchased one billion dollars of Bitcoin. It is an issue that the governments have in mind, not for speculation for the future, but possibly because other rival governments have already begun accumulating some of them.
Crypto is not used yet as a financial weapon to displace another currency or create financial instability, but as a defence mechanism against financial attacks on sovereign economies.
It is mostly a countermeasure against financial attacks so far, but in a future of sudden geopolitical changes and increasing tension, there can be more use cases than that.
Another point we need to take into consideration is the neverending creation of narratives by the BTC proponents. Once again it sounds incredible that China wants to weaponize Bitcoin and use it to replace the dollar standard.
Bitcoin is not working as a currency right now, it is not preferred by anyone to be used instead of the dollar, euro, or fiat that is still relatively stable. Many more cryptocurrencies that are costing less in fees and are more efficient are already preferred by crypto users. Telling the US government to put attention to Bitcoin because China may have the aforementioned plan is something that I am sure we will read more about later from the Bitcoin community.