Bretton Woods III: a new world monetary order

In 1944, as WWII was coming to an end, the Bretton Woods system of monetary management was established. It set the rules for financial relations between countries, for their central banks and governments. It also created the IMF, the World Bank and WTO. This week, Zoltan Pozsar, Credit Suisse’s short-term interest rate strategist, published a note about a new world monetary order, which he called the “birth of Bretton Woods III”.

In his words, he see this as, “a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the eurodollar system and also contribute to inflationary forces in the West.” What does that mean for us? And what part might cryptocurrencies play in it?

Bretton Woods I was based on a gold-based system where the U.S. dollar dominated and was freely convertible into gold. This changed dramatically in 1971 when the US had to change its currency, “so that the dollar was free-floating and backed by the full faith and credit of the government,” not gold.

Bretton Woods II then became the model. In this, the dollar still dominated, but in a system that mostly uses “inside money.” Inside money is someone else’s liability, while outside money is nobody’s liability. This is why we have a system that is largely based on debt. For example, when China holds US Treasury bonds that is inside money. When Russia sells USD to buy gold, that is outside money. It makes things pretty complicated when you factor in the full package of economic sanctions against Russia, and add in the fact that China holds massive amounts of seizable, U.S.-based inside money. It could sell its US Treasury bonds to “fund the purchase of “subprime” Russian commodities,” writes George Kaloudis in Coindesk, but it would also give China control over inflation. Such a move could also lead to commodity shortages and a recession in the West.

Pozsar’s note suggests there is a “new confiscation risk associated with US inside money,” that could spark a new monetary regime, as the world turns to focus on outside money, such as gold and other commodities, as countries try to boost their reserves. Or they might turn to cryptocurrencies, particularly Bitcoin.

At the end of his note, Pozsar wrote, “After this war is over, “money” will never be the same again…

…and Bitcoin (if it still exists then) will probably benefit from all this.”

Crypto’s positive reaction to Biden’s executive order

Although there has been a slight pullback in the crypto market since yesterday, and watching it daily is like some version of the game Snakes and Ladders/Chutes and Ladders, there has been a positive response to the Biden administrations executive order. The order “will require U.S. federal agencies to create a regulatory framework for digital assets, as well as explore a future digital dollar,” Cointelegraph reports.

For example, Coinbase surged up 10.5% at market close, and Microstrategy posted a 6.4% gain. Exchange traded funds (ETFs) also experienced a renewed positive view of crypto, with ProShares Bitcoin Strategy ETF gaining 10% and Valkyrie Bitcoin Strategy ETF closing up 10.3%.

Mining companies had some of the biggest gains following the executive order. Riot Blockchain Inc. shares shot up 11.2% and Marathon Digital Holdings Inc. were up by 13.5%.

Tom Miitchelhill comments that while the crypto market is used to volatility, “these are unusually volatile moves on traditional markets.” However, before everyone gets to excited, let’s remember that Coinbase “is still down nearly 48% from its direct listing price in April last year.” And Bitcoin, although it initially racked up a 9% price increase when details of the executive order were leaked, it then retraced its steps sometime after.

Why so much positivity about the US order? Mitchelhill says, “the executive order was considered by most investors to be if not a net positive for the crypto industry, at least a lot less bad than had been feared.”

One reason is that President Biden has positioned the rise of digital assets as, “an opportunity to reinforce American leadership in the global financial system and at the technological frontier.” And whilst nobody knows exactly what sort of regulatory measures may be expected, the general view is that the US government is being ‘constructive’. It also potentially means “that the executive order will potentially work to expand the adoption of virtual currencies within the U.S. financial system.”

US Treasury Secretary, Janet Yellen, commenting on it, said: “President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy. This approach will support responsible innovation that could result in substantial benefits for the nation, consumers and businesses.”

There are of course divisions in the crypto community over it, but it will be interesting to see how this plays out and who it benefits in the long term.

Crypto isn’t an escape route from sanctions

“Why doesn’t Russia just use Ripple if it can’t use SWIFT?” a young person asked me the other day. He is not alone in thinking that cryptocurrencies are a ‘workaround’ for Russia as it faces heavy economic sanctions. Indeed, with decentralization being a core value of crypto, it does seem that it should be a solution, but of course the reality is actually much, much different.

The reality is that crypto exchanges have far too much to lose if they allowed huge movements of crypto into the Russian Federation. Nobody wants to penalise the ordinary Russian person with crypto, and we have seen many of them protest about the Kremlin’s actions. Still, the authorities are on the look out for any infringements.

FinCEN sends a message to exchanges

For example, the United States Financial Crimes Enforcement Network, or FinCEN, a bureau of the Treasury Department, has warned financial institutions to consider crypto as a possible means Russia may attempt to use to evade sanctions. They have sent out a warning to US-based financial institutions “with visibility into cryptocurrency” (eg Coinbase) to report any activity that could be considered a potential way for Russia to evade sanctions.

Biden to sign crypto executive order

President Biden is about to sign an executive order on cryptocurrencies this week, outlining his administration’s view of the sector, and it is thought this has been brought forward as a result of the invasion of Ukraine. The Ukrainian minister of digital transformation, Mykhailo Fedorov has directly appealed to crypto exchanges on social media, urging them to block addresses of Russian users. Cointelegraph reports “many exchanges including Binance and Kraken have said that they will not unilaterally act to block ALL users in Russia from accessing their coins unless there were a legal requirement for them to do so.”

But the exchanges are taking action – because they must!

A view from the crypto exchanges

Changpeng Zhao, CEO of Binance, have taken to Twitter, to explain that since banks follow the sanctions rules, then so do cryptocurrency exchanges.

Brad Garlinghouse, CEO of Ripple, also slammed the allegations that Russia may use cryptocurrencies to get around economic sanctions. And he explains why it is wrong to think exchanges might be able to wriggle around the law. As he points out, worldwide crypto trading platforms rely on a variety of banking partners. These banks and crypto trading platforms would risk losing their licenses if a blocked country or individual breaks through all necessary security measures to conduct transactions on these platforms. That is why there are very stringent KYC and AML policies in place.

And Brian Armstrong of Coinbase has also weighed into the debate, saying that cryptocurrencies are not a way to evade sanctions, because “every United States firm must comply with the law; it makes no difference whether they engage in dollars, crypto gold, real estate, or any other type of non-financial asset.”

Ultimately, the reason Ripple or other cryptocurrencies won’t really help Russia is this; blockchains work on an open ledger, so any illegal transaction would be even more traceable than cash, gold or other assets.

Bitcoin flippens the Rouble

On 1st February, Russia’s central Bank reported that the country’s money supply was 65.3 trillion roubles, worth approximately $629 billion. Now that Bitcoin has broken through the $41,000 resistance point, its market cap has surpassed that of the Russian currency.

According to data from CoinMarketCap, Bitcoin’s market cap surged to $780 billion on Monday, 28th February, as the price increased by 5.7%. It now stands at over $43,000, an increase of around 13%.

It’s not difficult to see how this occurred. Due to the economic sanctions hitting Russia in response to its invasion of Ukraine, Russia’s Central Bank was forced to raise interest rates to 20%, sending the rouble into freefall. As the deeper sanctions, including the exclusion from SWIFT, hit Russian markets on Monday, the value of the rouble started its decline and has continued to lose its spending power by 30% due to inflation. 

At the same time, United States dollar-pegged stablecoin Tether witnessed a spike of over 30% in five days against the Russian rouble, and data from crypto exchange Binance shows that the rouble is undergoing inflation as the USDT/RUB trading pair — for the first time in history — crossed 105 roubles. Prior to the spike, the USDT/RUB pair maintained a comparatively steady market price below 80 roubles.

Russian and Ukrainian residents rush to crypto exchanges

Meanwhile in Russia and Ukraine, residents seem to have driven trading activity up on exchanges, possibly over concerns about the stability of their countries’ respective fiat currency. Another factor in this is Ukraine’s call for Ukraine’s cryptocurrency donations to help the government and the people. And, on the first day of the invasion, 24th February, Cointelegraph reported that the Ukraine-based crypto exchange Kuna had around $4.4 million in total trading volume of all tokens over a 24-hour period.

Crypto and NFTs come to Ukraine’s rescue

For Ukrainian citizens fleeing the country, the financial situation is perilous. As one tweeted, “My Ukrainian cards don’t work anymore, although I am safe in Kazakhstan. Crypto is the only money I still have, and today I can say without exaggeration that BTC, ETH and NFT are going to save my life while I can’t come back home.”

Prominent crypto entrepreneurs have also been active. FTX CEO Sam Bankman-Fried was one of the first to offer monetary support to FTX traders from Ukraine by giving all of them FTX $25 each.

As he said, “Do what you gotta do.”

Other support for Ukraine has come from feminist band Pussy Riot. Its new UkraineDAO immediately attracted thousands of followers on Twitter. It is collaborating with PleasrDAO, the DeFi collective, and Trippy Labs, an NFT studio. The UkraineDAO is an NFT drop of the Ukrainian flag, with tokens issued and all proceeds raised donated to organizations supporting the people of Ukraine. The minting price will be set at 0.08241991 as a tribute to Ukraine’s Declaration of Independence on Aug. 24, 1991.

With Bitcoin surging it would seem that an appetite for risk has returned to the crypto markets after a bumpy February, although it is difficult to say whether this is a short-term move or if it could herald a return the all time highs seen last year. Aside from that, it is also interesting to watch crypto’s role in this conflict and observe how that plays out.