There is no quarter of mainstream news media that is not heavily saturated with news about the Russian invasion of Ukraine. The same war is sending huge ripples through practically all industries of the global economy. While the same process takes place, the emergence of new monetary systems is also likely to take place. That process is not something that is novel to the modern history of the world and big turbulence usually generates them either by design or spontaneously.
A good example is the Bretton Woods system, which is unknown for many in the world, but also something that could quickly become a household name for some parts of Europe or other regions of the world. It predates big financial international institutions and thus holds a value that might come in as very useful in the contemporary political and economical situation. It is also directly tied to their questions of long-term value and what that could entail in the coming months and years. Naturally, gold has been gaining a lot of exposition in that regard, but once more, many are wondering whether that will apply to bitcoin, after several missed chances for the same perception to take root in the general public.
Bretton Woods System Explained
The origins of the Bretton Woods system reach back to the middle of the 20th century. Back then, it was established around 1944 as World War II was raging, but still slowly coming to a close. Its aim was to set a system of rules that would define relationships between countries that otherwise had very little financial interactions. It also became the basis for the World Bank, World Trade Organization, and the International Monetary Fund.
Basically, it set out the rules that the governments and central banks needed to follow in terms of finances so that the process of international economic collaboration could take place on a much larger scale. While it is a complex venture that involved many moving parts over a very turbulent period in history, the system still cemented some key concepts of the modern interconnected world of global finance. In that regard, it succeeded immensely in shaping the modern world. Today, many believe that the same reshaping will be needed as well, but now with a strong element of crypto that could really turn it into digital gold.
National Financial Reserves
In the realm of global finances, the concept of national reserves, or a country’s monetary reserves, is frequently mentioned, but rarely explained. Put simply, it states that any sovereign country holds a range of different fiat currencies, but also commodities and securities. These are used when the same country races to macro monetary and macroeconomic events. That means that nations react similarly to many esports competitors, who can react to particular issues with relatively simple processes, which only need to be available and ready to be implemented.
For example, if a country sees that its currency is falling in value, it can sell foreign currency and buy its own. Using a range of stuff that a country has in reserve allows governments and their central banks to react to changes in the economic climate. Here is where the Bretton Woods system fully comes into play – its first version was based on gold reserves and the fact that USD is convertible into one ounce per 35 USD. However, that system changed in the 1970s when the USD was no longer backed by gold. The second version of Betton Woods came into play and it was debt-based. That is why China holds such a saw today over the US economy.
In the midst of the Russian invasion of Ukraine, the world’s economies are also shaking with tectonic changes. On the global markets, sanctions that Russia is now under make a whole universe of difference when it comes not just to the value of the ruble, but also the means that the country will trade from now on. Economics points out that the foundations of Bretton Woods II are now shattered and Russia relies more on gold than on USD. China might look for a similar solution but try to enforce it before a huge geopolitical earthquake like the war in Ukraine.
That is where bitcoin comes in. While it and other digital currencies are not what many believed will be a new version of gold, they are still an independent source of financial value. That is the reason why they could move into their new position but on a much larger scale than they previously did. Not just in terms of the possibility that Russia will suddenly begin to purchase them, but fiat will become very unstable.
For much of the previous two years, the main cause for concern was the issue of inflation in the wake of the COVID-19 pandemic. Now, that concern is the geopolitical situation that is becoming more and more volatile on a huge transcontinental scale. The existence of bitcoin and stable digital currencies – stable in the sense that they are not going anywhere as active networks – means that there is a potential way not to shield oneself from inflation but the movement of the sudden changes in the political arena. Of course, getting to that position will not be easy or quick for any nation.
Also, the fact that any country, for example, Russia, is seeking out digital currency would not be similar to someone like El Salvador doing the same. Instead, the US and European Union would seek means to block that from happening and yet again undermine the value of the same tokens. The cryptocurrency field still remains open to the tug and pull of the traditional markets, especially when they come with the biggest package of sanctions ever seen in the modern era. However, the potential of bitcoin becoming gold 2.0 is presently bigger than it ever was. Many would also argue that this potential finally appeared in its true, non-hedge form.