Follow the yellow BRIC route (Towards a new digital reserve currency?)

The Reserve Bank of India (RBI) creates a new set of arrangements to enable businesses to settle foreign trade in rupees. This means that, to use an obvious example, Russian and Indian organizations can exchange goods and services without using dollars. Under the agreements, Russian banks will be required to open rupee accounts with Indian banks and Indian banks will need ruble accounts in Russia. Both countries would have to agree to hold a sum, say $1 billion, in local currencies in their respective accounts. Thus, Russian banks will have rupees worth $1 billion in their Indian accounts and Indian banks will have rubles worth $1 billion in their Russian accounts. Indian exporters can then be paid in rupees for their Russian exports (from rupees held by Russian banks in their Indian accounts) while Russians are paid in rubles for their Indian exports (from rubles held by Indian banks on their Russian accounts). Once a mutually acceptable market-determined exchange rate is decided, trade between India and Russia can proceed without dollar legs.

But what is this exchange rate? Should it be determined by reference to the US dollar? Or would it be better to have another reserve currency that does not depend on the value of the dollar at all?

In June, President Putin (presumably spurred on by the international community’s response to the Russian invasion of Ukraine) declared that Brazil, Russia, India, China and South Africa (the BRICS ) develop a new basket-based reserve currency. The assumption is that it will include Real, Rubles, Rupees, Renminbi and Rand to present an alternative to the IMF’s Special Drawing Right (SDR). Much like Facebook’s doomed Libra project, the goal is to create a stable reserve currency that can be used in international commerce. In this case, the reserve of Brics Bucks (as I call them) will be completely independent of the dollar.

Given that India imports large amounts of oil from Russia, for example, a mechanism to establish payments completely independent of the dollar is of great interest to both nations. Russia could price oil in Brics Bucks and get payment in rubles while India could price pharmaceuticals in Brics Bucks and get payments in rupees (although I note that Russia is not even listed in the top 10 Indian export markets).

Will it have a lot of impact? Not in the short term. ING analysts say that while it could be a “high-level political statement”, they doubt that trading nations in the BRICS sphere of influence want to transfer precious foreign exchange reserves, especially dollars, into Brics Bucks and that if these nations are indeed responding to the militarization of the dollar, then they (like Russia) might prefer to go gold.

This may be disappointing for crypto fans, but I haven’t seen any mention of bitcoin
or any other cryptocurrency in the BRICS announcement, so the idea of ​​Bitcoin as digital gold may have to bide its time.

In any case, Bitcoin is far from being able to replace gold as a reserve. On the one hand, the price can be manipulated too easily: analysis of price movements in recent times shows that whenever the price of Bitcoin started falling, Tether
was issued by Bitfinex and sent to two other exchanges, where it was used to buy Bitcoin – the price of which would then increase.

(Although, as the recent sentencing of JP Morgan traders shows, the price of gold may come under similar attack. A federal jury in Chicago sentenced Michael Nowak, the former head of JPMorgan’s global metals trading office, and Gregg Smith, who worked as a New York trader and executive director of impersonation, wire fraud, material fraud commodities and attempted price manipulation. Prosecutors had accused them of flooding the market with buy and sell orders – which at the time represented between half and three-quarters of visible gold and silver markets – that they did not ever intended to execute, while trying to gain an edge over algorithmic traders. )

It does, however, make you wonder if the world needs a new reserve currency. Do we need a new digital gold standard? And if so, should it be fiat or commodity-based? And if it is to be based on commodities, then which commodity? Should there be a digital gold standard?

Gold is the new gold

Digital gold and Brics Bucks on one side, physical gold tokens are also making headlines. The U.S. Mint sold 426,500 ounces of gold in the first quarter of this year (+3.5% YoY), its best gold sales in nearly a quarter century, and Zimbabwe just launched new gold coins be sold to the public in an effort to combat chronic hyperinflation. The coins can be converted into cash, exchanged and used for transactions according to the Reserve Bank of Zimbabwe, but people can only exchange the coins for cash after they have held them for at least 180 days.)

(If you bought Canadian “Maple Leaf” gold coins instead of US or Zimbabwean coins, you might be shocked because the German police dismantled a gang of crooks who sell fakes with the face of Her Majesty Queen Elizabeth II on them.)

People buy gold, that’s for sure. According to my good friend (and golden bug) Dominique Frisby, last month, the London market saw a 44% increase in gold bought by doctors and 59% in gold bought by investment bankers. I’m not sure exactly what that means, but I take it as evidence of a potential market for gold-backed stablecoins, and that’s where I thought ING’s observation was rather interesting.

Gold is of course not the only commodity suitable for asset-backed stablecoins. In fact, as the Tokenized Commodities Council (founded by Diamond Standard, Atomise, Paxos, and Lode) puts it, options don’t stop at physical assets which are generally thought of as inflation hedges. Santander recently announced loans secured by tokenized soybeans and corn, with each token corresponding to a ton of grain. They say this indicates a “vast range of unexplored possibilities for tokenized products”.

I agree with them, but it should be noted that there are already a number of gold pegged tokens in the market. They are designed similarly to stablecoins, but rather than being backed by fiat, they are backed by the value of physical gold held somewhere verifiable. These doctors, investment bankers and others might find it rather convenient to buy and trade gold tokens in wallets on their cellphones.

(Options already available range from Perth Mint token and Tether Gold
up to Pax Gold and others.)

Following recent interesting developments regarding the sanctioning of Tornado Cash addresses (a “mixer”), it seems to me that this exciting digital gold may have an interesting trading edge over the boring heavy metal, which is provenance. Gold used to be fungible, but now it’s not, because of Russia’s invasion of Ukraine. Immediately after the Russian invasion, the London Bullion Market Association (LBMA), a trade body that set market standards, removed all Russian refineries from its accredited list, meaning their newly minted bullion could no longer be traded in London or on the COMEX exchange in New York, the largest gold futures trading platform. Britain’s Royal Mint had Russian bullion worth around $40 million in its ETF and got rid of it almost immediately.

The Bank of England, which has Britain’s largest gold vault, said it considered Russian gold bars made before the invasion eligible for trade, but the gold produced after March 8 is not “London Good Delivery”. One could easily imagine gold tokens that represent metal mined and refined outside of Russia starting to trade at a premium to tokens that represent Russian gold!

(If investors pull Russian gold out of their portfolios, the price could drop $1 to $40 an ounce relative to non-Russian gold according to industry sources cited in this report.)

In their time

Would real digital gold (i.e. tokens backed by actual gold reserves rather than cryptocurrencies) be attractive in the longer term? I have absolutely no idea, but I was thinking about it when I listened to an episode of the long-running BBC Radio series “In our timeon the subject of the Gold Standard. Host Melvyn Bragg and his guests (Catherine Schenk, Professor of Economic and Social History at the University of Oxford; Helen Paul, Lecturer in Economics and Economic History at the University of Southampton; Matthias Morys Senior Lecturer in Economic History at the University of York) discussed the system that flourished from the mid-Victorian era when gold became dominant and more widely available, following the gold rushes in America and in Australia.

Interestingly, in the introduction to the radio discussion, Mr. Bragg said the “golden century” was from 1870 to 1970. Mr. Frisby tells me it was from 1816 following the great overhaul and Britain’s return to convertibility after the Napoleonic Wars. until 1914, when Britain, France and Germany abandoned the gold standard to print money to pay for the Great War.

I disagree with both, not that it matters, but in my book on the history and future of money Before Babylon, Beyond BitcoinI took a more technological view and dated the golden age of the invention of electronic money in 1871 (when money became pieces of atoms) to Richard Nixon ending convertibility gold in 1971 (when silver became just bits.)

Anyway, regardless of the exact dates, under the Gold Standard, national currencies around the world were linked to gold and therefore to each other, which meant stable exchange rates. The idea started in Britain, where the pound sterling was considered “as good as gold”, and as other countries adopted the gold standard, confidence in their currencies increased and the combination stability and confidence led to a boom in trade and prosperity. There’s no need for a detailed history lesson, but the fact is that this Gold Standard lasted for a while and then it ended. Without getting into the whole thing between Wall Street and Main Street, it doesn’t come back whether it’s based on physical or digital gold.

Currency commentator Charlie Crowson recently says that what is perhaps surprising is not that the classic gold standard ended, but that it lasted so long and, given my limited knowledge of economics, I agree. When it comes to digital gold, I think tokens are great, but that doesn’t mean there will be a digital gold standard, whether based on real gold, Brics Bucks or Meta Money. The world has evolved.

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