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Bitcoin (BTC) has grown so quickly in the last few years that it is now the most well-known cryptocurrency. As recently as November 2021, its value reached an all-time high as people found out how useful it is in the real world. Bitcoin is mostly used as an alternative way to pay for things, but it is also a good way to save money because it is more resistant to inflation. In some sections, it is felt that Bitcoin's continued upswing and widespread use around the world could see it replace the U.S. dollar as the world's reserve currency in the long run. Such views have become increasingly popular lately and many believe that it's high time governments across the world started holding BTC in their national reserves.
How did the Dollar Become the World's Reserve Currency?
78 years ago, 730 delegates from 44 countries met in Bretton Woods, New Hampshire, to chart a post-war financial order for the world. The deliberations laid the foundation for the global financial system we have today. They led to the founding of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development, and the U.S. dollar as the global reserve currency. The U.S. dollar remains the dominant reserve asset. Most countries keep a monetary reserve consisting of the dollar, precious metals, and other highly liquid assets to meet their financial obligations. These reserves are meant to regulate a country's money supply and manage liquidity for transactions in the global market. However, the United States has been accused of using the dollar's disproportionate influence in global trade to perpetuate neo-imperialism and neo-colonialism. And with the rise of other competing financial and geopolitical powers such as Russia and China, there has been an increase in calls to curb "America's exorbitant privilege" by replacing the U.S. dollar as the world's reserve currency. This is where we feel Bitcoin comes in and governments should seriously start considering holding BTC in their national reserves.
Should Governments Hold BTC in National Reserves?
In 2021, El Salvador made bitcoin legal tender, showing that the cryptocurrency may be on track to compete with the world's most important reserve currencies if more countries start using it. But can BTC be a good asset for governments to hold in their national reserves, to either complement the dollar or replace it? Below, we give a few reasons why we think more governments should consider adding BTC to their national reserves:
- Trust
Apart from the U.S. dollar, the IMF has also approved other reserve currencies such as the euro, the British pound, the Japanese yen, and the Chinese yuan. But the issue of trust still plagues all these currencies. Countries such as the United States and China have been known to mismanage their currencies by printing excess money or engaging in pointless currency wars. Such actions often have a detrimental effect on other countries' national reserves. But with BTC as a reserve currency, a government can better protect itself from the economic shenanigans of more powerful nations.
- Shedding Undue American Influence
Many countries in Central and South America rely largely or exclusively on the dollar. For instance, more than a fifth of El Salvador's GDP comes from remittances from the United States. This means that such countries often find themselves operating within the U.S. Federal Reserve's scope of influence. Any changes in the United States' fiscal policy tend to have an effect, good or bad, on the economies of these countries. This makes it harder for these countries to exercise their sovereignty. But if these governments were to adopt the "Bitcoin Standard," legalize BTC, and incorporate it into their national reserves, they would certainly free themselves and their economies from the undue influence of American policymaking.
- Combating Inflation
Fiat currencies are inflationary in nature. Governments can always print more of them. For example, countries like Argentina, Venezuela, and Zimbabwe have been hit by hyperinflation because their governments have printed money without thinking. But unlike fiat, BTC has a finite supply capped at 21 million units. This in-built scarcity means that, over time, the cryptocurrency has the potential to be extremely valuable. So, putting BTC in a country's national reserve could not only protect it from inflation caused by the excessive printing of fiat currencies like the dollar or the yuan, but it could also make the country richer in the long run if the value of BTC goes up over time as expected.
- Protect the Economy from the Effects of Currency Manipulation
The global currency market has been affected by currency manipulation on multiple occasions. Several countries regularly and intentionally devalue their currencies in relation to other currencies to reduce the cost of exports and gain an advantage over competing nations. Since Bitcoin is decentralized and can't be manipulated in any way, a country with BTC reserves could protect its economy from the bad effects of currency manipulation.
Final Thoughts
BTC has many of the attributes required to function as a reserve currency- it is portable, indestructible, divisible, recognizable, homogenous, valuable, and has utility. However, most governments are still wary about cryptocurrencies as they fear they could enable citizens to circumvent capital controls and destabilize existing financial infrastructure systems. However, if they are to deal with the issues of currency manipulation, inflation, and undue American influence, it's high time that governments start adding BTC to their national reserves.