In the era of Trump, will Bitcoin still have a place?

Rage Commentary : Throughout human history, no international monetary system will remain invincible forever. As digital economic activities become more and more decentralized, after the collapse of the US dollar system, a digital and decentralized currency trading system is needed - Bitcoin, which can bypass inefficient intermediaries. And the main function of reserve currency is to resist cross-border currency risks, which can be achieved through Bitcoin's smart contracts. Therefore, in order to attract foreign investors, Trump should consider this plan.

Translation: Nicole

History shows that no international monetary system lasts forever. Barry Eichengreen, a leading thinker in the field, reminds us time and again that these systems tend to break down quickly, whether it’s the dominance of Roman coins, the status of the British pound as the universal unit of currency for international trade, or the gold standard throughout the world.

The same is true of the dollar's informal status as the international reserve currency. Its hegemony will disappear at some point, and when it does, it will be replaced very quickly, and the world will also see the emergence of a new commercial currency.

Below I explain the triggers for this decline and whether it is likely to occur over the next four years. President Trump is right about the collapse of the dollar system.

I would also argue that this time, even if the dollar system collapses, it will not be replaced by another obsolete euro, yen, or yuan, nor will we return to a precious metal standard, as much as the gold standard people desire.

In the interim, we could move world trade into a monetary transition period of these multilateral combinations of paper and commodity currencies, but this would soon become unwieldy and cumbersome, and out of touch with the changing global economy.

The fact is that we now operate in a digital economy where activities are increasingly decentralized, with transactions occurring peer-to-peer and, when the Internet of Things is in place, machine-to-machine. The online decentralized economic architecture requires a digital and decentralized monetary transaction system that bypasses the inefficient financial intermediaries in the fragmented banking system.

The solution may not be Bitcoin itself, but I think Bitcoin’s distributed, network-run value transfer system could provide a template for future models. This is one possible explanation for the volatility in the digital currency’s price on Tuesday night and into Wednesday.

Change is coming

Why think Trump could make this chain possible? To be sure, we don’t know what changes the next president will bring, but he has certainly caused uncertainty about the direction of U.S. policy.

However, this is not a satisfying answer. So let’s analyze some of the ideas Trump has proposed and how they might change international perceptions of the U.S. dollar-based international system:

Rights determined by ethnic background

Trump believes we should exclude foreigners from the outside (Muslim visitors to the United States), illegal citizens from the inside (undocumented Hispanic immigrants), and citizens from the inside (people who, according to judges, are not of Mexican descent). This is not just a moral question; it goes to the heart of whether American law can be impartial.

This impartiality is critical to whether foreign investors are willing to hold dollar assets. Will President Trump frown upon anyone being able to assert their contractual property rights in the United States, no matter who or where they are? If so, would it be possible to get those investors to repatriate some of the trillions of dollars they hold in the United States, thereby protecting the dollar’s ​​reserve status?

Disregard for international treaties

Whether it’s Trump’s aggressive opposition to free trade (with Mexico and China) or his disregard for NATO and other international security treaties, the president-elect does not hold existing international agreements in high regard. Yet America’s commitment to these countries and treaties is integral to the dollar’s ​​role as the currency track for international trade.

This insular mentality could lead to the United States cutting off support for the Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank, two cornerstones of the current international financial system that are already being squeezed by a Republican-led congressional financing coalition.

Foreign governments trust the United States and allow it to hold their foreign exchange reserves, with the implicit understanding that Washington will support key elements of the international framework in cross-border transactions.

Commitment to the American Security Umbrella

Trump’s withdrawal from NATO, his apparent embrace of Russia, and his seemingly lax policy on nuclear proliferation suggest a significant reduction in U.S. military deployments around the world.

This security structure is the foundation of the dollar’s ​​dominance — in return for Washington’s spending on ships, planes and personnel protecting the world’s trade routes, it is an implicit requirement that the world use dollars to conduct transactions on those routes.

Distrust of the Fed

Trump explicitly criticized Janet Yellen during the campaign, saying she should be "ashamed" for keeping interest rates low and challenging the independence of the most important institution responsible for maintaining the value of the dollar. What impact will this have on foreign investor confidence?

Out-of-control federal deficit

The Commission for a Responsible Federal Government believes that Trump's campaign spending proposals will add $5.3 trillion to the U.S. debt burden over the next 10 years, a staggering figure that is 25 times what Hillary Clinton proposed.

If it were to take on half of that, the government would have two options: default on the debt or monetize it through inflation. Either way, the result would be a massive devaluation of the dollar, similar to the one President Nixon triggered in 1971 when he abandoned its gold peg.

Speaking of the Nixon shock, it is worth remembering that it was implemented by executive decree, with only a very small and close-knit group of presidential advisers aware of the audacious plan. The event provides a valuable reminder of the ways in which a determined president can unilaterally change the international monetary system.

I'm not saying Trump is willing to take such actions, but these are precedents and foreign investors will take these factors into consideration when making bets on the dollar.

Enter Bitcoin

As for what comes next, it is worth considering why many governments are reluctant to participate in current dollar-based transactions. It is no secret that China wants to reduce its reliance on the dollar in foreign trade, which in turn means not having to hold a trillion dollars of national reserves in US Treasuries.

But there are also some smaller governments that are very vulnerable to the dollar system, because any change in US interest rates can have a destabilizing effect on their economies. This situation deprives them of their monetary autonomy.

But interestingly, new digital currency solutions inspired by (not based on) Bitcoin could help these countries wean themselves off the US dollar.

The digital ledger technology that Wall Street banks are using to enable real-time settlement of securities transfers can also be used to enable real-time settlement of trade flows. If Chinese exporters can now make payments directly to Russian importers in RMB and rubles, rather than relying on the US-dominated international banking system, where clearing transactions through the system's aggregate transfer process would be cumbersome and time-consuming, then payments between the two countries would no longer have to be converted three ways through US dollars.

Meanwhile, in smaller emerging markets, governments are exploring digital currency solutions that could bypass banks and even allow them to create independent monetary policy systems.

So why do we need reserves when smart contracts give businesses and governments automated tools to eliminate cross-border currency risk? The only reason to hold reserves (defer the use of funds) is to protect against these risks.

Decentralized future world

To me, these changes in monetary technology, and every aspect of our increasingly digital and decentralized global economy—from machine learning and augmented reality to drone delivery and 3D printing—cannot happen after the dollar, where the international solution for managing the exchange of value becomes another fiat currency-based system. The new architecture will come from decentralized digital technology itself.

I have never had any illusions that the powerful (the ones who help decide the future) will lean towards Bitcoin. But right now, there aren’t many other ways to hedge against these changes. Bitcoin is the only lever (proxy asset class) we have to enable a future financial system based on a decentralized distributed trust network.

So if you’re worried or excited about President Trump’s upending of the global monetary system, and I am both nervous and excited, I think Bitcoin is a creative way to prepare for what might happen next.