Renminbi, Dong, SDR, USD, and the Flood of Central Bank Money onto the Blockchain
Two monetary worlds are crashing together.
The old fiat currency world which is structured around exchange rates and foreign exchange reserve accounts is being shattered by the new world of blockchain assets. The history of socioeconomics has proven that the less advanced cultures and economies are fragmented and absorbed into the more advanced systems which are expand under the exciting momentum of ingenuity and endless opportunity.
The beginning of 2018 has become a sort of holding area, or panic induced quicksand, for most of the cryptocurrencies. The value explosion that started in the second half of 2017, and continued at the beginning of 2018, has substantially reversed. Values are fluctuating within a wide band which varies by asset.
Understanding the deficiencies and imbalances in the old system helps us understand the value attraction to the new blockchain based architecture. The central bank accumulation of the sovereign domestic currencies of the G7 countries, with the American dollar making up the largest majority, is quickly becoming obsolete. This includes the exchange rate methodologies which have been the underlying contributor to geopolitical tension and regional wars.
These exchange rate practices are difficult to maintain and manage, with a whole Forex industry built upon the value gaps and geopolitical predictions. The trade imbalances between America and China is just one example. These imbalances between trade surplus and trade deficit are directly correlated with the value of the each national currency.
The United States has the worlds largest trade deficit because of the exchange rate which is forcibly maintained through geopolitics and military mobilizations around the world. China has the worlds largest trade surplus because it has maintained a trading band between the renminbi and the USD. The dollar is overvalued and the renminbi is undervalued.
Every other nation which functions within the same international monetary system has a trade deficit/surplus and exchange rate which is under pressure between these two giants. Nations like Vietnam have seen the value of their domestic sovereign currency depreciated to the point of non-existence because the exchange rate methodology cannot allow for the sovereign currency with the largest market capitalization, being the USD, to depreciate.
The economic fundamentals of Vietnam have been stellar for over a decade and yet the exchange rate of the dong is only pennies on the dollar. At one point Vietnam had the fastest growing GDP in the world. Something is definitely wrong when its currency has been depreciated to the point of being the punchline of a joke. The potential of the dong to appreciate has always been, and would have been made possible when China completely ended the exchange rate peg it holds with the dollar. At that point Vietnam would have ended its own dollar peg and anchors the dong to the Chinese renminbi.
Such a scenario could still happen of course, but the growing crypto asset market is making such a monetary adjustment redundant.
Whether the value of the renminbi, dong, or any other emerging market currency, appreciates against the USD, it is a developing fact that all fiat currency will depreciate against the relentless appreciation of cryptocurrencies. This means there is still opportunity and gains to be made with the Forex markets and the forthcoming value fluctuations between currency pairs. But the better opportunities and gains will be made in the world of blockchain and crypto assets.
Central banks are well aware of this growing threat. Some have even threatened making crypto exchanges illegal. But this will be temporary as the blockchain explosion continues and all banks and institutions don’t want to be left behind. The first to market in many situations will gain leverage over those who enter the market late.
Consider, all of the circulating fiat money in the world, being coins and banknotes, is estimated to be around $5 trillion. A large percentage of this is USD which has been the primary reserve currency in the world since 1944. All central banks hold vast amounts of dollars and the majority of international trade and energy sales are transacted in USD. This has been somewhat changing over the last few years as China and Russia have been working with other nations on building currency swap arrangements and non-USD denominated trade agreements.
When you include equity markets, sovereign wealth funds, real estate, bonds, SWIFT accounts, debt, and derivative markets, the total wealth of the world is measured in the hundreds of trillions. Some have attempted to put an exact number on this, but it is impossible, as exchange rates and market values will forever be fluctuating.
Central bank foreign exchange reserves are the next obvious target for cryptocurrencies. China has a foreign exchange reserve of around $3 trillion measured in USD. Now consider that China has the largest trade surplus in the world.
Compare that to the crypto market capitalization at the peak in January of 2018. The market cap was $700 billion and has since dropped to around $500 billion. In comparison the total market capitalization of the Special Drawing Right (SDR), a basket of sovereign currencies issued by the International Monetary Fund, is less than $300 billion.
China and other nations had been promoting the SDR as the replacement of the USD in its international function. The amount of SDR liquidity was always an issue and a lot of monetary engineering would have had to be put into the SDR to make it function as a reserve asset and exchange rate anchor for all sovereign currencies. But the growing crypto asset market has changed all of that.
Central banks will soon have to start adding crypto assets to their foreign exchange reserves. This will hedge the depreciation of fiat currencies as the crypto assets accelerate and appreciate. As the value of the fiat currencies drop each bank will increasingly exchange it for cryptos in order to maintain appropriate reserve valuations. As the crypto market cap expands, the central banks could even see a huge increase in reserve valuations. But the function and reason for both foreign exchange reserve accounts and central banks will be smashed in the coming years as the world of blockchain and FinTech remove the need for such archaic institutions.
2018 is shaping up to be a huge year for crypto assets. All of the top cryptos, such as Bitcoin, Ethereum, LiteCoin, Ripple, and a host of others, will begin to be added to the central banks reserves. Ripple is uniquely positioned to replace the USD in the transaction and payments function internationally.
Over the next few years old institutions and processes will fade and die like Blockbuster Video. This includes SWIFT, and perhaps even Forex markets, with equity markets being completely redesigned to function in the crypto world. Ripple XRP will surpass all others and will lead the charge on changing the financial and monetary world. – JC
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JC Collins can be contacted at email@example.com