African Reserves

Bretton Woods Bitcoin Conference in El Salvador

Kudzai Kutukwa is a passionate advocate for financial inclusion and has been recognized by fast company magazine among the top 20 young entrepreneurs under 30 in South Africa.

In July 1944, in Bretton Woods, New Hampshire, more than 730 delegates from 44 countries gathered at the Mount Washington Hotel in what became known as the Bretton Woods Conference. The main agenda was to create a new international monetary order that would be implemented at the end of World War II, especially since the classic gold standard had been abandoned after World War I. This new international system would finance post-war reconstruction and improve the flaws of the gold standard by learning from the lessons of the Great Depression. According to the history of the Federal Reserve:

“This was an unprecedented cooperative effort for nations that had been erecting barriers between their economies for more than a decade.

“They sought to create a system that would not only avoid the rigidity of previous international monetary systems, but also resolve the lack of cooperation between countries on those systems. In the interwar period, governments not only undertook competitive devaluations, but also implemented restrictive trade policies that deepened the Great Depression.”

In summary, this conference aimed to encourage economic cooperation among nations through a new monetary system that would also discourage the contradictory economic policies of the Great Depression era. During this time, a financial system was created in which all other world currencies were to be backed by the US dollar, with the dollar itself being backed by gold. The price of gold was set at $35 an ounce and central banks were also able to exchange dollars for gold. This became known as the Bretton Woods system. This system held until August 15, 1971, when President Richard Nixon ended the convertibility of the dollar into gold because the United States could no longer honor its commitment to do so. In reality, it was a sovereign default of the US government.

A few decades later, central bankers and financial regulators from 44 emerging countries gathered in El Salvador for the Alliance for Financial Inclusion (AFI) summit. Contrary to popular opinion on social media, this was not a Bitcoin event, but was generally focused on financial inclusion, in line with AFI’s vision to “make financial services more accessible”. to the unbanked around the world”. It is interesting to note, however, that financial exclusion is a natural consequence of the current monetary system, partly because of the inherent cost structures that financial institutions must bear to ensure the profitability of “banking” customers, as well as costs imposed by a credit-based payment system that does not have instant final settlement of payments. These are disadvantages that the Bitcoin network does not have, even from a financial inclusion perspective. For example, in 2017 only 29% of Salvadorans had a bank account, but the Chivo Bitcoin wallet now has 2.6 million users (about 40% of the population) since bitcoin became legal tender last year. Bitcoin is certainly the most financially inclusive network in the world.

According to a Tweeter by the President of El Salvador, Nayib Bukele, several issues were discussed at the conference, including banking for the unbanked, the digital economy, and the benefits of bitcoin adoption in El Salvador. It should also be noted that this conference was held at a time when the global economy is faltering and characterized by rising levels of inflation, rising commodity prices, geopolitical tensions as a result of the war in Ukraine, an impending recession and a weakening dollar. Although the aforementioned conditions are different from the situation in 1944 when Bretton Woods came into effect, it is worth noting that the above factors combined provided a perfect storm for a new monetary order. For example, after the seizure of Afghanistan and Russia’s foreign exchange reserves by the United States, it became clear to most nation states that US Treasury bonds were no longer the “risk-free” assets. “they were, and that diversification away from “freezable assets” is a matter of national security. Nic Carter summed it up perfectly in an op-ed, writing the following: “While the seizure of Afghan or Russian reserves may seem fair and just, the immediate effect of such action is to completely undermine the credibility of dollar debt as an international savings device. “While the hegemony of the dollar is at stake, the birth of a new monetary system is imminent.

A view also shared by Credit Suisse analyst Zoltan Pozsar, who after the seizure of Russian foreign exchange reserves predicted that the world would likely revert to a commodity-backed monetary system, which he dubbed ” Bretton Woods III”. In a report of the same name, he made the following remarks,

“We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered on commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. … When this crisis (and the war) is over, the US dollar should be much weaker and, conversely, the renminbi much stronger, backed by a basket of commodities. “money” will never be the same again…and Bitcoin (if it still exists then) will likely benefit from all of this.”

It is very likely that as sovereigns seek to diversify away from US Treasuries, the scenario of a commodity-based monetary system, i.e. the gold standard 2.0, will likely be a temporary step on the way to adopting bitcoin as the new global reserve currency. Gold-based monetary systems have failed in the past and are prone to centralization, especially since the largest gold reserves on the planet are held by just three countries: the United States, China and Russia. Current events and tensions indicate that such a system is anything but stable or cooperative.

Fidelity Digital Assets shared the following view regarding Bitcoin nation-state adoption in a recent report,

“History has shown that capital flows are where they are best handled and the adoption of innovation leads to greater wealth and prosperity. We also believe there is a stakes game theory very high at stake here, that if bitcoin adoption increases, countries that secure bitcoin today will be more competitive than their peers. Therefore, even if other countries don’t believe in the thesis investment or adoption of bitcoin, they will be forced to acquire it as a form of insurance. In other words, a small cost can be paid today as a hedge against a potentially large cost higher in the coming years, so we wouldn’t be surprised to see more sovereign nation states acquiring bitcoin in 2022 and perhaps even seeing a central bank make an acquisition.

El Salvador has already paved the way in this direction by being the first nation-state to adopt Bitcoin as legal tender, a move that represents a paradigm shift from the current fiat monetary system as well as material-based monetary system. premieres as predicted by Pozsar. A move that was later copied by Prospera, Honduras; Madeira, Portugal; Lugano, Switzerland; and the Central African Republic, as planned by Fidelity. Despite Zoltan’s skepticism of bitcoin, “Bretton Woods III” is likely to be a bitcoin monetary system because it is likely the only existing asset currently that is fully decentralized and is a neutral means of international settlement that encourages cooperation across the world. above the war.

While the conference in El Salvador was primarily focused on financial inclusion, it gave the government of El Salvador a unique opportunity to share its bitcoin adoption journey with other financial decision makers. A Bitcoin-focused panel was also part of the lineup and was presented by the two entrepreneurs behind Bitcoin Beach, Roman Martinez and Nicolas Burtey. During the presentation, they spoke at length about the history of Bitcoin Beach, the payment systems that were built, as well as Bitcoin and the Lightning Network. Additionally, attendees took a tour of Bitcoin Beach where they got to see first-hand what financial inclusion looks like under a Bitcoin standard. During the tour, they had the opportunity to buy coffee and coconut with bitcoins through the Lighting Network and exchange bitcoins for dollars using a bitcoin ATM. According to Galoy (the developers of the Bitcoin Beach Wallet), the central bankers in attendance were able to discover how bitcoin benefits people who are financially excluded from the current financial system.

Financial inclusion is the Trojan horse that will eventually lead to the gradual adoption of bitcoin by emerging countries, and during this conference, El Salvador took this opportunity to plant the seeds for greater bitcoin adoption. by nation states. In light of the central bankers’ Bitcoin Beach tour, JAN3 CEO Samson Mow said: “What happened in El Salvador is the spread of hope and freedom through the Bitcoin adoption We now have nation states working on orange pilling other nation states which is pretty amazing if you think about it Everything is accelerating and it is bullish for bitcoin.

As the cracks begin to appear in the current monetary system, it is only a matter of time before we begin to see more adoption by nation states. History will consider this year’s edition of the AFI Summit as “the gunshot heard around the world” for ushering in a bitcoin-based monetary system.

This is a guest post by Kudzai Kutukwa. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.