El Salvador’s Bitcoin Bretton Woods Conference
Kudzai Kutukwa is a passionate financial inclusion advocate and was recognized by Fast Company magazine as one of South Africa’s top 20 young entrepreneurs under 30.
In July 1944, in Bretton Woods, New Hampshire, over 730 delegates from 44 countries gathered at the Mount Washington Hotel in what became known as the Bretton Woods Conference. Since the old gold standard was abandoned after World War I, the main goal of the conference was to create an international monetary order. The new international system would finance postwar reconstruction, and draw on the lessons from the Great Depression to improve upon the flaws in the gold standard. According to Federal Reserve History:
“It was an unprecedented cooperative effort for nations that had been setting up barriers between their economies for more than a decade. They sought to create a system which would not only eliminate the rigidity of the previous international monetary systems but also address the lackluster cooperation between the countries involved in those systems. The interwar period saw governments undertake competitive devaluations and set up trade policies that exacerbated the Great Depression. “
In summary, this conference sought to incentivize economic cooperation among nations through a new monetary system that would also discourage adversarial economic policies of the Great Depression era. The financial system was established in which all other currencies around the world were to be backed with U.S. dollars and the dollar itself was backed by gold. The price of gold was fixed at $35 an ounce and central banks were also able to redeem dollars for gold. This system was known as the Bretton Woods System. This system held until August 15, 1971, when President Richard Nixon ended dollar convertibility to gold because the U.S. could no longer honor its commitment to do so. In reality, this was a U.S. sovereign default.
Fast forward a couple decades later, central bankers and financial regulators from 44 emerging market countries gathered in El Salvador for the Alliance for Financial Inclusion (AFI) summit. Contrary to popular belief on social media, this event was not a Bitcoin-related event. However, it focused on financial inclusion in line with AFI’s vision of “Making finance more accessible to the world’s unbanked.” A few decades later, central bankers and financial regulators from 2021 emerging market countries gathered in El Salvador for the Alliance for Financial Inclusion (AFI) summit. These are disadvantages that Bitcoin network has, even from a financial inclusion standpoint. For example as of 2017 only 29% of Salvadorans had a bank account, but the Chivo Bitcoin wallet now boasts of 2.6 million users (approximately 40% of the population) since bitcoin became legal tender last year. Bitcoin is the most inclusive financial network in the world.
According to a tweet by the president of El Salvador, Nayib Bukele, multiple issues were discussed during the conference that included banking the unbanked, the digital economy and the benefits of El Salvador’s bitcoin adoption. It is important to note that the conference was held during a period when the global economy has been in turmoil. This includes rising inflation, rising commodity prices and geopolitical tensions due to the war in Ukraine. There is also a looming recession, and a weakening dollar. While the aforementioned conditions are different from the state of affairs in 1944 when Bretton Woods kicked in, interestingly, the above factors combined have provided a perfect storm for a new monetary order. After the U.S. took control of Russia’s foreign reserves and Afghanistan, it became clear to most nations that U.S. Treasurys are no longer “risk-free” assets and that diversification away is a matter national security. Nic Carter summarized this perfectly in an op-ed piece, writing the following, “While seizing Afghan or Russian reserves may feel righteous and just, the immediate effect of such action is to completely undermine the credibility of dollar debt as an international savings device.” The birth of a new monetary structure is possible as dollar hegemony hangs in balance.
A view also shared by Credit Suisse analyst, Zoltan Pozsar, who, after the seizure of Russian FX reserves, predicted that the world would likely return to a commodity-backed monetary system, which he dubbed “Bretton Woods III.” In a report by the same name, he made the following remarks,
“We are witnessing the birth of Bretton Woods III — 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 … When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities. 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.”
It is very likely that as sovereigns seek diversification away from U.S. Treasurys, the scenario of a commodity-based monetary system, i.e., gold standard 2.0, will likely be a temporary stopgap measure on the path to bitcoin adoption as the new global reserve currency. Due to the fact that only three countries hold the largest global gold reserves, gold-based monetary systems have been ineffective and are susceptible to centralization. Current events and tensions suggest that such a system is anything but cooperative or stable.
Fidelity Digital Assets shared the following perspective concerning Bitcoin nation-state adoption in a recent report,
“History has shown capital flows to where it is treated best and embracing innovation leads to more wealth and prosperity. We believe there is a very high stakes game theory here. If bitcoin adoption increases, countries that have bitcoin will be more competitive than their peers. Even if countries don’t believe in bitcoin adoption or the investment thesis, they will have to purchase it as insurance. This means that a small investment today can be used as a hedge against a potentially higher cost in the future. We therefore wouldn’t be surprised to see other sovereign nation states acquire bitcoin in 2022 and perhaps even see a central bank make an acquisition. “
El Salvador has already led the way in this direction by being the first nation-state to adopt Bitcoin as legal tender, a move which represents a paradigm shift away from the current fiat monetary system as well as the commodity-based monetary system as predicted by Pozsar. This move was copied by Prospera in Honduras, Madeira, Portugal, Lugano in Switzerland, and the Central African Republic. Despite Zoltan’s skepticism regarding Bitcoin, “Bretton Woods III” will probably be a bitcoin monetary system since it’s probably the only asset currently in existence that is fully decentralized and is a neutral international settlement medium that incentivizes cooperation above war.
While the conference in El Salvador was focused on financial inclusion, it offered the government of El Salvador an opportunity to share their journey with other financial policymakers. Roman Martinez and Nicolas Burtey, two entrepreneurs who founded Bitcoin Beach, presented a Bitcoin-focused panel. 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. The attendees were also able to tour Bitcoin Beach and see how financial inclusion is done under the Bitcoin standard. They were able to buy coffee and coconut with Bitcoin via the Lighting Network and to exchange bitcoin for dollars at a Bitcoin ATM. According to Galoy (the developers of the Bitcoin Beach wallet) the central bankers in attendance got to experience how bitcoin benefits people that are financially excluded from the current financial system.
Financial inclusion is the trojan horse that will eventually lead to gradual bitcoin adoption by emerging market countries, and during this conference, El Salvador used this opportunity to plant the seeds for more nation-state adoption of Bitcoin. JAN3 CEO Samson Mow said that the Bitcoin Beach tour was a catalyst for the spread of hope and freedom through Bitcoin adoption. It is amazing to see how nation-states are now orange pilling other nations. Everything is moving at an accelerated pace, which is good news for Bitcoin. “
As the cracks start to appear in the current financial system, it’s only natural that we will see more nation-state adoption. The history will remember this year’s AFI summit as the “shot heard around the world” to bring about a bitcoin-based monetary structure.
This is a guest post by Kudzai Kutukwa. These opinions are not necessarily those of BTC Inc. or Bitcoin Magazine ..
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