As China and Russia Move Toward a Gold Standard, US Must Join Them or Counter with Bitcoin

As someone who was skeptical about cryptocurrencies, I posted an article a few months ago (see here) where I laid out a US policy shift towards a gold standard based on:
- President Trump's favorable statements toward gold during the presidential campaign
- The impossibility of successfully implementing President Trump's economic priorities
- Eventual blame put squarely on the FED for economic stagnation or economic collapse
- China's economic internationalization and preference for gold

With the current administration's concern over serious trade deficits and complaints over Chinese currency manipulation, a USD devaluation (or currency reset) is a realistic policy option. But, the gaining acceptance of bitcoin (and other cryptocurrencies) will be a factor in setting policy. For example, the suggested border tax by the Trump administration will be virtually impossible to implement:
Mexican remittance tax could lead to Bitcoin boom - Axios, February 7, 2017

"Nobody wants to talk about it, but the number one use case for bitcoin (beyond speculation) is and will continue to be circumventing capital controls," says Ryan Selkis, managing director of CoinDesk. "If the cost of remittance shoots way up in any given corridor, Bitcoin will get more popular."

Japan, one of the major US trading partners, has seriously advanced the use of cryptocurrencies:
Bill making cryptocurrencies legal way of payment comes into force in Japan - RT, April 1, 2017

Bitcoin (like other cryptocurrencies) is a decentralized currency (see videos below for more details) as opposed to a fiat currency that is centralized. As more cryptocurrencies (i.e. Dash, Ripple, Ethereum) gain acceptance (current market caps), there will not be an easy way for governments to regulate them. We are seeing a new paradigm in place where any time a country's currency is in danger of devaluation (an official lowering of the value of a country's currency within a fixed exchange rate system), the countries' citizens buy bitcoin. In the past, people would line up at a currency exchange center to exchange their local currency for a more stable one (i.e. USD, EUR). Now, the most simple and easy thing to do is just to go online, open an account on a cryptocurrency exchange and buy bitcoin.

Here are two recent examples:

Mexican Peso Weakens, Google Searches for Bitcoin Rise - The Merkle, January 12, 2017

Although it is still early to establish a correlation between bitcoin and the struggling economy of Mexico, it seems as if the economic uncertainty of Mexico has led to rising demand for bitcoin.

On January 10, CNBC analyst Brian Kelly revealed that Google Trends for bitcoin spiked as the peso weakened. In fact, Google searches for the keyword “bitcoin” almost reached an all-time high record this past week, being close to surpassing Google Trends interest for bitcoin in late 2013.

Bitcoin is devaluing China’s currency but the country won’t do much about it - Salon, February 25, 2017

China has been trying to curb the practice of using bitcoin to circumvent rules limiting the amount of money Chinese mainlanders can send abroad, which is currently capped at $50,000 a year.

This capital flight has caused a drop in the value of the renminbi and Chinese regulators have connected the dots between last year’s drop in the value of the country’s currency and a corresponding rise in the value of bitcoin. Bitcoin bought in renminbi accounted for a staggering 98 percent of all bitcoin trading activity in the last six months of 2016, according to bitcoinity.org.

Eager to convert the Chinese currency into a more stable global currency and stash that wealth abroad, many Chinese mainlanders have been buying bitcoin locally in renminbi and then, using bitcoin’s blockchain technology, which allows users to safely transmit bitcoin through the Internet, they’re sending bitcoin to other countries where recipients (family members, friends or other contacts) convert bitcoin back into a local currency which can then be used to make investments outside of the country.

Note that China's capital flight issues are not due to bitcoin. In an article last November, Barron's details the serious issues with the Chinese economy which predate last month's rise in bitcoin price:
Is China’s Currency Heading for a Big Fall? - Barron's, November 2, 2016

China has hinted at attempts to implement regulations to remedy the matter.
Bitcoin Can Not Cross “Some Red Lines” In China Post ETF Refusal: PBoC - The Cointelegraph, March 14, 2017

In a translated summary of his findings uploaded to Twitter by cnLedger, Xuedong stated, among other items, that “most Bitcoin investors are young people” and that exchange behavior such as faking trading volumes “should be examined and regulated.”

Bitcoin’s future in China “cannot work out without regulations,” he said, speaking in the wake of the US refusal of the first Bitcoin ETF.

In a truly free society, capital flows efficiently. The rise of bitcoin buying in China was simply a reaction to an inevitable currency devaluation. It was not the root cause of this devaluation. China is caught trying to balance competing interests: keep up with the latest technology to further grow its economy vs preventing a currency devaluation that could potentially lead to an economic catastrophe.

But what if the rumors of China (and Russia) banding together to dump the US dollar are true and that they are holding up their economies until the right time to move towards a gold standard. This bombshell reports seems to confirm the idea.

Moscow And Beijing Join Forces To Bypass US Dollar In Global Markets, Shift To Gold Trade - Zerohedge, April 2, 2017

Speaking on future ties with Russia, Chinese Premier Li Keqiang said in mid-March that Sino-Russian trade ties were affected by falling oil prices, but he added that he saw great potential in cooperation. Vladimir Shapovalov, a senior official at the Russian central bank, said the two central banks were drafting a memorandum of understanding to solve technical issues around China’s gold imports from Russia, and that details would be released soon.

If Russia - the world's fourth largest gold producer after China, Japan and the US - is indeed set to become a major supplier of gold to China, the probability of a scenario hinted by many over the years, namely that Beijing is preparing to eventually unroll a gold-backed currency, increases by orders of magnitude.
...
"We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets," First Deputy Governor of the Russian Central Bank Sergey Shvetsov told Russia's TASS news agency.

In other words, China and Russia are shifting away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may day backstop their respective currencies.

So, I suspect that in the event that China and Russia announce a move toward some form of a gold standard (i.e. gold backed trade note), virtually all fiat currencies (those not backed by gold, silver, oil, etc.) will hyper-inflate. In that case, people will lose confidence in central banks and the only viable alternative will be cryptocurrencies like bitcoin.

For the US, there are two options - either back the USD with gold or devalue the USD which will thereby encourage the US population to use cryptocurrencies.

We'll probably have our answer soon.

Good References:

These are two great introductory videos on Bitcoin.

 
An info-graphic related to Miners, Wallets, Hardware & Storage, Exchanges, Payment Processors, Merchants, Investment & Banking, Media & Advocacy, Developer Tools, Blockchain Development, Financial Services
The Entire Blockchain Ecosystem in One Visualization - Visual Capitalist, May 30, 2016

Bix Weir contends bitcoin is more viable than gold or silver.
ALERT: Perfect Storm for Silver, Gold and Bitcoin

Other interesting articles:


When the Dollar Collapses, which is better Money, Gold or Bitcoin? - Cryptocoins, March 21, 2015

Bitcoin vs USD vs Gold – Here’s why Bitcoin wins - 99 Bitcoins, July 25, 2016

Bitcoin Is Now As Good As Gold, Actually It’s Better - Dollar Vigilante, March 3, 2017

Bitcoin vs Gold: Which is a Better Long-Term Bet? - Coindesk, April 1, 2017