Could Central Banks Dump Gold In Favor Of Bitcoin?

Authored by Charles Hugh Smith via OfTwoMinds blog,

All of which brings us to the "crazy" idea of backing fiat currencies with cryptocurrencies, an idea I first floated back in 2013, long before the current crypto-craze emerged.

Exhibit One: here's your typical central bank, creating trillions of units of currency every year, backed by nothing but trust in the authority of the government, created at the whim of a handful of people in a room and distributed to their cronies, or at the behest of their cronies.

And this is a "trustworthy" currency?

Exhibit Two: central banks can't become insolvent, we're told, because they can create as much currency as they want, whenever they want. And this is a "trustworthy" currency?

Exhibit three: and here's what happens when trust in the currency is lost due to excessive currency issuance: the currency goes from 10 to the US dollar to 5,000 to $1 and then to 95,000 to $1, on its way to 2,000,000 to $1:

Yes, this was once a "trustworthy" currency.

While many people expect China to issue a gold-backed currency some day, they overlook the inconvenient reality that China is creating far more fiat currency than it is adding in gold reserves. They also overlook that gold-backed means nothing if the currency isn't convertible into gold.

If it isn't convertible, it isn't gold-backed. Claiming there's gold somewhere in a vault doesn't make a currency gold-backed, as the central bank can devalue the currency it issues at will. Gold-backed means the currency is pegged at X units of currency to 1 unit of gold, and X units of currency can be exchanged for 1 unit of gold.

All of which brings us to the "crazy" idea of backing fiat currencies with cryptocurrencies, an idea I first floated back in 2013, long before the current crypto-craze emerged: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013)

Since there is no real-world commodity backing the digital currency, its value must be based on scarcity and its ubiquity as money. The two ideas are self-reinforcing: there must be demand for the digital money to create scarcity, and the source of demand is the digital currency's acceptance as money that can be used to buy commodities, goods, services and (the ultimate test) gold.

Speaking of gold, correspondent Liberty Philosopher recently posed a scenario that was new to me: if gold continues losing value, could central banks dump their gold in favor of cryptocurrencies?

Yes, I realize this is anathema to those who anticipate a gold-backed currency becoming the dominant form of centrally issued currency, but the idea of governments that have debauched their currencies building reserves of decentralized and limited-in-issuance cryptocurrencies may not be as farfetched as you might imagine.

Here is Liberty Philosopher's commentary:

My understanding is that gold is kind of a reserve asset held by governments that provides the ultimate assurance that they are able to pay their debts. If the value of the assets they hold, which are a guarantee of their ability to pay, begins to erode, and the erosion in value is not a temporary or passing phenomenon, but a continuous and long-term trend, this would imply that the ability of governments to ultimately pay their debts would be eroding. If the value of gold begins to decline, governments who have gold reserves, but whose ability to pay their debts may be somewhat in question, would come under pressure to fortify their reserves as proof that they remained able to pay their debts.

If the price of gold were to continue to decline, my thought is that governments would be under pressure to sell the reserve asset that was declining in value, because the continuing decline in value would call into question their ability to repay their debts. They couldn’t just sit there and allow their reserves to decline in value year after year. They would have to act. If the need for having some kind of “hard” currency reserve remains (creditors may not want to accept newly printed bank notes in lieu of “hard” reserves), and they are forced to begin selling their gold reserves, what other hard reserve asset could they obtain or purchase? I think they could become purchasers of the most valuable cryptocurrencies as a replacement for their gold reserves.

The ideal reserve gains in purchasing power over time. If Venezuela had purchased bitcoin in size when it was $100, or even $1,000 in January 2017, its own currency wouldn't be heading to near-zero quite so quickly.

In my book A Radically Beneficial World, I proposed that nations which had debauched their centrally issued fiat currency could acquire the labor-backed currency I propose as reserves.

The acquisition of decentralized cryptocurrencies as reserves may sound crazy now, but as central banks destroy the purchasing power of their fiat currencies, all sorts of ideas that seem crazy now will start looking practical once the death spiral of the current unstable monetary regime begins.

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nope-1004 Mr.Sono Wed, 12/13/2017 - 10:28 Permalink

Could Central Banks Dump Gold In Favor Of Bitcoin? If their plan all along was to distract the public away from real money, gold and silver, and into something they can trace, track, tax, and control.So.... YES!Anyone know where I can buy some of the gold bigcoins always pictured in these articles?  There always seems to be a table full of them.  Where's the mint?  And who sells them?Otherwise...... the picture isn't misleading, is it?lol

In reply to by Mr.Sono

Mementoil 3LockBox Wed, 12/13/2017 - 10:46 Permalink

I'm adding this article to my collection of "most ludicrous articles about Bitcoin", which one day will be used to mock this entire phenomenon.No, central banks will not be backing their currencies with crypto currencies. First and foremost because they don't want their currencies backed with anything trustworthy (something which will make it difficult for them to inflate the money supply).Central banks don't really mind it if the public loses all faith in their currencies, because then the national debts gets eroded to zero, and they get to start over with new fiat currencies, as they have done countless times in the past.

In reply to by 3LockBox

Gap Admirer nope-1004 Wed, 12/13/2017 - 11:39 Permalink

Yes, central banks will all be in sweat flop panics, rushing off to buy sets of numbers generated by people living in their mom's basements. LOL!

If they want crypto they'll get on the new crypto coin generation web site, click for 10 minutes, and have their crypto. Who knows, maybe they'll even copy the open source code and hire a programmer or two to generate their own encrypted numbers instead of clicking for 10 minutes. No need to buy from a kid in his mom's basement.

In reply to by nope-1004

Antifaschistische Mementoil Wed, 12/13/2017 - 11:19 Permalink

1000+ to you lockbox and memetoil.The only Bitcoin promo article that we have NOT seen yet, is this one..."The US Treasury, and other sovereign nations will completely resolve their pending fiscal crises by issuing their own cryptocurrencies to pay off all debt"or perhaps"US Treasury now accepting Bitcoin for outstanding IRS Debt obligations"or perhaps"world hunger to be erased by 2023 as bitcoin becomes accepted at grocery stores around the world"

In reply to by Mementoil

Kilroyishere Antifaschistische Wed, 12/13/2017 - 13:59 Permalink

Von Mises would kick your scrawny ass for saying this progressive socialist diatribe, puddin pop.Here's the headline you should be worried about:Estimated 25 Million Gun Owners Take To The Streets When Fed Reserve Trades One Fiat For AnotherWarning:  Never underestimate the resolve of a Constitutional-minded Patriot.  They will kick your ass ever time.

In reply to by Antifaschistische

BobEore Mementoil Wed, 12/13/2017 - 11:29 Permalink

'Central banks don't really mind it if the public loses all faith in their currencies, because then the national debts gets eroded to zero, and they get to start over with new fiat currencies, as they have done countless times in the past.'

Well. you're getting warm. And while CHS hit a few salient points here and there too... what everyone chooses to leave out of the equation, for varying motive,

is that "Central Banks" are NOT and were NOT designed to be the executive instruments of STATE policy - but rather, from their inception, they were the instruments of those forces of FINANCE CAPITAL which wished to cloak their undertakings with the mirage of a national bank - accountable to the sovereignty of the state in which it was situated.

Under those circumstances, when the veil is lifted, the operations of a central bank expose the machinations of a criminal cabal which organizes it's rackets in such a way as to have them appear to be the initiative of 'politicians' and publicly accountable bureaucrats.

"The Regency period of England… circa the time of the Napoleonic Wars and the formation of classic Liberalism as a political model was exactly when monopoly finance capital was making its first big leap from merely influencing governments in the direction it desired, to actually owning governments outright."

The historical preference and modus operandi of this cabal is clear - it is and always has been via the 'precious metals' that they have accomplished their aims... and in the 'hypothecation' of currency, development of 'derivatives' and the creation of 'virtual currencies' we see nothing more than the feints of age old measure, simply repackaged in a modern parlance - to regale the same audience of rubes with the majic which opens their wallets and dissolves their brains.

In an age where the probity of governments and economists has been rendered purposely suspect by the men who pull their strings from behind curtains, the most suitable vehicle for mass deception will be the "anti-government' antidote... marketed as the cure all for what ails all!

Having destroyed the reputations of governments, whilst looting their treasuries of all value, our usual suspects will now turn their attentions to looting the savings of the individuals who saved themselves previously from being looted by the state!

Take no note of the movements of the man with the peas under shell... his deceptions of perceptions are perfectly fine, and upfront. It can only work by the perceiver deceiving themselves... and that lust for self-deception is the grist which has run the mills of millennia of debt/interest/usurers....

for time untold!

In reply to by Mementoil

EddieLomax 3LockBox Wed, 12/13/2017 - 11:51 Permalink

Yep, this bit was a corkercould acquire the labor-backed currencySo bitcoin is backed by almost nothing (okay illegal drugs and online scamming apart), you can't buy much with it, even Steam stopped taking it just recently.  And this guy is asserting that its part of a labour backed currency?  The sterling I work for is debased badly, but at least I can convert that into something useful, hence I still work for it, but bitcoin?  Why should I accept this as a price for my labour?   If I was going to demand a high quality asset it would be gold, silver or other precious metals, all of these have real world value.Meanwhile there are a rapidly increasing number of crypto-currencies, and each one can potentially fork all its way to infinity (and beyond), I'd be accepting potatoes as currency before I'd be accepting that, its got to have something real backing it first.

In reply to by 3LockBox

Griffin Ghost of PartysOver Wed, 12/13/2017 - 15:33 Permalink

Central banks don't actually print money, since it is almost entirely digital now.All the money CB "prints" is issued as debt, and the collateral guaranteeing the value of the currency is you.Its different with Crypto currencies, because there is nothing behind them, so if economies are based on CC and something unexpectedly explodes, there is no ballast in your ship to keep you above sea level.  

In reply to by Ghost of PartysOver

zebra77a nope-1004 Wed, 12/13/2017 - 11:16 Permalink

Decentralized crypto does not need a central bank for it to exist and flourish.  It does need an internet or a form of communication along with a LOT of computational power for an incentive to mine it.Bitcoin is roughly capped to about 7 transactions / second limit, whereas Visa regularily handles 2000 transactions / sec up to 10,000/second during Christmas shopping binges.So Bitcoin *CAN* become a reserve currency / trust / store of value  and it already is, showing that even large governments have been unable to stop it (China).. however new hybrid forms of Merkle Tree Hash linking will be required that can effect faster transactions. Whoever solves this and makes a implementable software / system for it is gonna be *loaded*..

In reply to by nope-1004

The_merovingian zebra77a Wed, 12/13/2017 - 11:40 Permalink

Just to be clear: transaction rate was 6.6 Tr/sec before Segwit and could reach 20.3 if everybody would fucking upgrade their node.Also, I know it’s not as sensational, but if you compare it to bank settlements instead of third party Visa, all the upgrades in the drawers (lightning, Schnorr sig, etc..) would almost allow to match that already.LTC was always the real contender for Visa for many early adopters, not BTC (BTC: savings account, LTC: current account). 

In reply to by zebra77a

poeg zebra77a Wed, 12/13/2017 - 12:07 Permalink

Seriously? Blockchain won't have the shelf life IPv4 had and those who had stuck treasure into addresses, like MIT, started dumping last year when IPv6 couldn't be held back any longer. Hell, our ISP tried like hell to get us to "invest" in addresses every year until last when "no thanks" was also accompanied with "waiting for IPv6, period".

Something better is always in the pipe.

In reply to by zebra77a

Laowei Gweilo Mr.Sono Wed, 12/13/2017 - 10:31 Permalink

South Korea or China won't :PSouth Korea just joined China in banning financial institutions (and foreigners, so all the China that were driving up SK volume) -- at least according to Bloomberg as of a few hours ago(also going to shut down some of the exchanges, impose a new capital gains tax on BTC, and imposing new reserve asset rules to hold each customers cash in individual accounts) guess that's why the SKorea premium has crash from 30% to just 3% this week o.0 I could see a lot of sanctioned countries using cryptos though ~ or Russia created their own oil backed crypto, China a gold backed crypto. def not btc but their own yea sure.

In reply to by Mr.Sono

Bush Baby Mr.Sono Wed, 12/13/2017 - 11:09 Permalink

Bitcoin wouldn't take off if the USA were on the gold standard or it's block chain equivilant.If the central banks around the world do not wake up and bitcoin manages to go mainstream, the value of bitcoin will increase in relationship to the printing of new currency. This is the same concept as the gold standard.So Governments have some of the following choices 1) outlaw bitcoin ( would probably be unconstitutional ) 2) surrender to bitcoin as it becomes the world currency/store of value ( single bitcoin would be valued in the millions) 3) create their own limited edition chain block currencies ( They’re still fucked because they would lose the ability to print more money) 4) try to destroy bitcoin by buying up huge quantities of bitcoin and then dumping all at once to crash it, over and over again (Wall Street’s specialty) or hacking it in a major way.   My pick is #4 followed by #3 because they would at least have some control. Each country goes to limited block chain but value of each country’s coin is different. Also , people would more readily buy limited quantity USA-Coin backed and safely administered by the USA, than bitcoin.   

In reply to by Mr.Sono

EddieLomax Bush Baby Wed, 12/13/2017 - 11:57 Permalink

#4 would be easiest, all thee crypto-currencies flaunt their security being unhackable and their security of transaction because so many nodes are involved processing it.Throw the resources of a government at it and I'd question that security, who would want to be paid in cypto-currency if someone ran a simple denial of service attack at multiple major nodes at once, let alone a sophisticated attack.And that's without unleashing the one monopoly government in the west keeps for itself, violence.  Or seizing someone and demanding they hand over the keys (or infiltrating and stealing/hacking from the inside) is much easier when you can make it legal.

In reply to by Bush Baby

cheech_wizard Raffie Wed, 12/13/2017 - 12:17 Permalink

Historical side note: Clinton went further, as she herself said."I agree completely," she said. "I want to go further, though. I want us to have an absolute commitment to getting rid of lead wherever it is. Because it's not only in water systems. It's also in soil and it's in lead paint that is found mostly in older homes.""We will commit," she continued, "to a priority to change the water systems, and we will commit within five years to remove lead from everywhere."  Standard Disclaimer:  5 million metric tons.  

In reply to by Raffie

Raffie Mr.Sono Wed, 12/13/2017 - 12:05 Permalink

ROFLMAO.. thx.. I need a good laugh... ignorant people never fail to make me laugh. 20+ years from you will still be waiting and hoping to prove yourself right. Bitcoin, Ethereum and Litecoin are the manin 3 that will live long after most will fail.Get back with me in 20+ years and we will go over your thoughts again.

In reply to by Mr.Sono