Reserve assets are a form of international monetary support. They’re the last resort to prevent financial collapse and are usually in some kind of government or central bank’s hands. It could be gold, foreign currencies (think USD), reserve positions in another country’s currency, bonds issued by other governments, etc.; basically any type of credit which can be quickly converted into cash for day-to-day expenses when needed that has confidence from markets on its ability to hold value over time will do the trick–and Bitcoin might just fit this bill.
Credit Suisse – the Swiss global investment bank – released a report last week predicting a radical transformation of the world’s monetary system due to hyperinflation in the west and geopolitical tensions in the east.
For international payments, investments, and other aspects of the global economy, reserve assets can be currencies or other assets, such as gold and silver.
As per the International Monetary Fund (IMF), the US Dollar is currently one of the most common reserve currencies. Around 59 percent of all foreign bank reserves are currently held in the US Dollar.
Credit Suisse – the Swiss global investment bank – released a report last week predicting that the world’s monetary system is about to undergo a radical change. A “new monetary order,” which could benefit Bitcoin, could emerge as a result of soaring inflation and geopolitical tension in the east (the Ukraine-Russia war).
The report was written, in part, by former US Treasury Department and Federal Reserve official Zoltan Pozsar, now a short-term rate strategist at Credit Suisse (CS). It is unlike anything we have witnessed since the presidency of Barack Obama,” Zoltan wrote in his note
Towards the end of his note, he commented on Bitcoin, stating that it will benefit “if it still exists” at the end of the crisis, hinting at its potential to become the next global reserve currency.
Reserve Assets 101: What they are and why you need them
A reserve asset is a commodity, currency, or other type of capital held by institutions and countries as a hedge against global market fluctuations. In many companies, they serve as a reserve for cash on their balance sheets. They are meant to serve as a store of value that is independent from market fluctuations.
During the 19th century and earlier, precious metals like gold and silver were used as universal commodities as ways for people to efficiently store the value of their labor. However, because paper currencies could not be used on a daily basis, they were used as a layer of abstraction backed by gold stored in a safe place.
Bretton Woods is an agreement that was signed shortly after World War II ended. Under it, the value of the US dollar would be tied to gold, and other currencies would be tied to it as well. The dollar was eventually removed from gold by President Nixon in 1971, when this system began to fall apart over time.
The international community has used a simple fiat currency model ever since. Here, the currency is backed only by the government itself, while its value is determined by market forces of supply and demand.
Why Blockchain Should Revolutionize How You Manage Your Company’s Reserves
A major concern with this system is that countries that want to use their fiat currency as a global reserve asset must run a continuous trade deficit in order to meet global demand.
The central banks of major economies around the world are easily able to print fiat money to meet this demand. This has resulted in the injection of more than 10,000 billion dollars into the system over time.
In the US, it may be contributing to the high inflation rate. US dollar inflation is at its highest in 40 years, with the Consumer Price Index for January showing a 7.5% rise YoY.
This, combined with sanctions on Russia and the economic fallout of its conflict with Ukraine, could pave the way for a “new monetary world order,” as predicted in the Credit Suisse note.
Understanding Reserve Assets: The Crypto Perspective
Inflation, weakening purchasing power, international competition, and other factors threaten the value of institutions’ stored reserves today. Cryptocurrency like bitcoin, which is decentralised, shows great promise as an alternative reserve asset that cannot be affected by third parties.
The bitcoin database is a decentralised system of storing transactional data. Blocks of data are stored on a public ledger/database, which means that there is no central authority controlling the changes and actions occurring in the database.
Rather than relying on a central authority, the Bitcoin blockchain relies on a network of peers who each own a copy of the database, which means any changes to the database must be approved by everyone on the network. By using the bitcoin blockchain, the bitcoin structure is secure and immutable. As a reserve asset, bitcoin will remove the element of third parties controlling the structure, essentially removing their influence on the currency.
In addition, when Satoshi Nakamoto launched bitcoin, he set a restriction on how many bitcoin tokens could be introduced to the blockchain. Bitcoin has been set at 21 million tokens in order to make it a scarce asset and a hedge against inflation. By removing central intermediaries from the transaction process, bitcoin also makes it speedy. Bitcoin further provides a higher level of anonymity than fiat currencies, since only wallet addresses are attached to a person participating in transactions.
After the Ukraine war, Zoltan predicted that “money” would never be the same again, and Bitcoin could benefit from this change. We will have to wait and see how this conclusion plays out.
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