Thoughts No Longer So Cryptic

An article by Chiara Mezzogori

Bitcoin are living a growing momentum, is there going to be a paradigm shift in the global finance system? For more than a decade, cryptocurrencies have been at the centre of a highly controversial debate. Since their emergence in 2009, they have been a divisive topic globally, involving investors, policymakers, legislators, and even ordinary citizens. Now something is brewing: governments, including the United States, appear to be embracing a more positive stance toward the cryptocurrency market. This shift, particularly evident under Trump’s second term, raises intriguing questions. Could it mark a lasting change? To unpack the dynamics at play, we explore three key factors that might driving this transformation.

Cryptocurrencies resemble that particularly fascinating and "unconventional" friend who bursts into your life and is initially viewed with scepticism by your wary mother. These digital currencies emerged in a notably unstable financial landscape and needed time to gain recognition and deeper understanding. Over time, their evolution has unveiled immense potential but also critical challenges, especially in terms of regulation. To this day, regulation remains fragmented and uncertain, with significant differences among nations in legal definitions and assessments of consumer risk.

Over the past decade, governments worldwide have invested substantial resources in developing their understanding of cryptocurrencies, crafting regulations to govern this fascinating yet complex market. Switzerland stands out as “pro-crypto,” while the EU — keen on protecting investors — is steadily working toward more harmonized regulation. Meanwhile China, adopts strict rules banning private cryptocurrencies, but is boasting leadership in implementing its central bank digital currency (CBDC), the e-CNY, which is already widely used.  Completing this complex mosaic is  the United States, where federal agencies compete for control over cryptocurrencies. With the advent of Trump 2.0, the country appears to be at the start of a new “Bit-mania.” Over time, cryptocurrencies seem to have become the friend that your sceptical mother begins to understand. Are we heading toward a future where an invitation to dinner might even be extended?

Sentiment toward cryptocurrencies has been shifting, especially following major external shocks, such as Bitcoin's positive fluctuation after the COVID-19 pandemic, and the subsequent changes in monetary policies. Markets and individual perceptions seem to increasingly acknowledge cryptocurrencies as not only payment tools but also currencies for the global economy. 

Could cryptocurrencies be a means of achieving near-universal agreement? Could escalating trade and economic tensions between the two geopolitical blocs be strategically mitigated through cryptocurrencies, particularly Bitcoin, the most traded cryptocurrency?

Following the developments of recent months and, in particular, the recent presidential elections, the media is already discussing a new "bit-mania." One naturally wonders whether, unlike previous temporary surges, this phenomenon will become more stable this time. Data, along with the political climate — particularly heated on this topic — seem to support this trend. A chart from The Economist highlights how Bitcoin's price rose by 10% around the time of the U.S. elections, surpassing $93,000 and marking an increase of nearly 50% since mid-October. This represents a significant shift compared to the 2022-2023 period, during which cryptocurrencies crashed from their 2021 peak. 

Source: The Economist (2024)

As previously mentioned, this trend appears to be supported by recent political developments: on one side, the resurgence of Trump 2.0 and the enthusiasm of cryptocurrency advocates; on the other, the growing support from the BRICS nations for distributed ledger technology (DLT), which underpins cryptocurrencies and, in general, decentralized finance (DeFi). At the recent Kazan summit, with Russia at the forefront, BRICS countries emphasized their commitment to de-dollarization, albeit with significant “new approaches”. Instead of identifying a single international currency — a system currently seen as outdated — they aim for a complementary mechanism that ensures efficient allocation "without relying on infrastructure centered on a single currency," following the model of mBridge, a DLT-based payment platform.

The ongoing monetary war between the dollar and the renminbi underscores the potential for a wider Bitcoin adoption. This could even pave the way for a "Bitcoin Standard," a new global system for international exchanges, which, however, has learnt from the mistakes of the Gold Standard.

Firstly, we have reached a turning point (for many, far from a positive one) where traditional currencies, tied to national and supranational economic policies, are revealing significant limitations. In a global context marked by the gradual dissolution of borders between countries and the escalation of economic tensions among major world blocs, traditional currencies appear unable to adequately address the challenges of a rapidly transforming world.

Despite the dollar maintaining its dominance as a global reserve currency, holding around 59% of the total, BRICS nations are gradually bypassing dollar-based systems through bilateral agreements (e.g., China-Brazil) and alternatives to SWIFT - Society for Worldwide Interbank Financial Telecommunication - the centralized financial messaging system controlled by the central banks of Belgium, France, the United States, Canada, Germany, Italy, the Netherlands, Sweden, Switzerland, Japan, and the United Kingdom.

Geopolitical tensions, particularly those heightened by the Russia–Ukraine war, provide an important point for reflection. From an economic policy perspective, the sanctions imposed on Russia have clearly demonstrated how the U.S. dollar can serve as a powerful tool for geopolitical pressure, capitalizing on the global dependency on this currency. 

A report by ESPAS (European Strategy and Policy Analysis System) on global trends up to 2030 offers some intriguing insights into the future, even though we may not need to fear them too much. It's true that rapid technological changes and increasing economic fragmentation will shape global dynamics in the coming years. As a result, the future could witness a more diversified financial system, with an expanding role for alternative currencies, whether digital or traditional.

It is precisely in this scenario that cryptocurrencies are gaining importance. Thanks to their community validation network, cryptocurrencies are not vulnerable to international political shocks, except for investor sentiment, which can affect their market value.

Secondly, according to the previous logic, bitcoins should be immune to political dynamics and, therefore, could represent the last bastion of a truly democratic global system. They would not be an expression of one state over another.

Countries with strong currencies such as the dollar, euro or yuan might be reluctant to promote cryptocurrencies. On the other hand, their main financial entities - the central banks - would inevitably move away from influencing the value of the currency. However, economic policy must first study and understand the ‘new normalities’ with which it must contend. It might be interesting to consider the idea of a state starting to diversify its reserves by accumulating Bitcoin, especially now that gold is no longer a store of value and the value of traditional currencies is increasingly linked to trust, a trust that is increasingly fragile at the moment. Yet, the question arises: why does the US, under Trump 2.0, seem intent on reversing this trend? 

In fact, a series of entanglements have affected the ‘Bitcoin house’ since the last presidential elections. The 47th president is the first to declare himself openly pro-crypto. In contrast, the chairman of the federal agency SEC, Democrat Gary Gensler, launched a war against the cryptocurrency world years ago, heavily impacting the industry in recent years. However, following the election of Trump 2.0, Mr. Gensler will presumably be replaced by a pro-Republican. At this point, celebrations were already taking place at the bitcoin house, when November peaks were recorded. Subsequently, Elon Musk - who requires no introduction, but not many know that he was the main promoter of the cryptocurrency DOGEcoin - has been identified by the incumbent Trump as the person who will be given the official mandate to overhaul the state budget, seeking to cut government spending. Leaving little to chance, Musk calls this department D.O.G.E - Department of Government Efficiency. While struggling against de-dollarisation, it is clear that the US is positively shifting support towards the cryptocurrency market. A dynamic that highlights a fascinating paradox: during his second term, Trump openly declares himself pro-crypto. As pointed out, Bitcoin could effectively represent a credible alternative to the dollar. Trump is therefore effectively endorsing the “enemy within”.

Ultimately, a shift from traditional reserves to a digital reserve could be implemented. The blockchain, despite the limitations still present in regulation, would famously have the same significant advantages over traditional money reserves that it has as a payment instrument, especially in terms of transparency, decentralisation, security and accessibility. At a historical moment like the present, if the amount of currency in circulation were limited to an algorithm, it could more easily avoid the risk of uncontrolled inflation.

In a world marked by political and economic instability, Bitcoin's recent surge could signal not just another fluctuation, but a crucial turning point. By breaking free from the domination of national economic powers, cryptocurrencies - led by Bitcoin - could redefine the global financial landscape as a more innovative and equitable system. This paradigm shift requires bold and coordinated efforts, but presents a unique opportunity: for nations, even those divided by geopolitical tensions, to come together as pioneers in reshaping trust in the very concept of currency. Could Bitcoin be the catalyst for a truly democratic financial revolution? The stakes may have never been higher.

References

The Economist (2024) What the history of money tells you about crypto’s future. Link. 

The Economist (2024) Why crypto mania is reaching new heights. Link. 

ISPI (2024) BRICS Bridge: de-dollarizzazione con la spinta Trump? Link. 

ESPAS (2017) Tendenze globali fino al 2030: l’UE sarà in grado di affrontare le sfide future? Link. 

Birnbaum D. (2024) Can Bitcoin Solve The Sovereign Debt Crisis? Link.