Many people believe that our currency, and currencies around the world, should go back to the gold standard.
If you’re not familiar with the gold standard, it means that a country can only issue as much money as it has stored in gold.
A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The reason people like that idea is because it, in theory at least, would stop countries going into debt.
Up until the Great Depression, the US was on the gold standard, but as its economy went down the pan and its money dwindled, it realised it needed to change things up.
As I wrote in June:
Back in the 1933 the US was in bad shape. It was four years on from the infamous stockmarket crash of 1929 and the Great Depression was in full effect.
When we were in a similar situation in 2008, governments around the world simply printed more money to get us out of the crisis.
But back in 1933, that tactic was impossible. At that time, the US dollar was backed by gold.
So in order to print more money, the government would have to do one of two things:
1, either say that gold was now worth more, so that its reserves would allow for more money to be printed.
Or 2: get hold of more gold so it could print more money.
The government, in the end, decided to do both.
First it obtained more gold, then it said that gold was worth more than it had paid for it.
And where did the government get all this extra gold? It took it, by force, from its people.
By this point Britain had already stopped using the gold standard, giving it up in 1931. But the US would take another 38 years to finally give up the ghost.
Again, from my article in June:
In 1971 President Nixon did away with the gold standard. The US dollar was no longer pegged to anything and the government was free to print as much as it wanted.
When the last major financial crisis hit in 2008, the US government simply kept on printing money until it was out of trouble.
All told it printed over $4 trillion. That’s the equivalent of printing $110 million a day for an entire century. Try doing that while your currency is pegged to gold.
So, for better or worse, the next time major governments need money, they won’t need to take their people’s gold to get it, they will simply print it out of thin air.
The problem with this strategy, as many gold bugs and bitcoin investors point out, is what happens if people stop believing in this printed money’s value?
After all, it came out of nowhere and it doesn’t represent anything real. It’s only as good as the government’s word – hence why it’s called fiat currency: fiat meaning “by decree”.
The reason I am bringing this up again now is because of an interesting geopolitical move Iran has just made.
Would you trust a gold-backed cryptocurrency launched by the Iranian government?
According to the Tehran-based news agency’s English language website, the Central Bank of Iran (CBI) has given permission for the new crypto to be unveiled. Shahab Javanmardi, CEO of FANAP – an Iranian information and communications technology (ICT) firm – revealed:
“The Iranian cryptocurrency is backed by gold but its function is similar to foreign rivals. The domestically encrypted money is to ease optimal use of Iranian banks’ frozen resources.”
As CCN notes, this announcement by the Central Bank of Iran came days after Iran outlawed all private cryptocurrencies and crypto-related businesses.
It seems like Iran has taken note of how hard bitcoin and other cryptos are to shutdown or sanction and realised it could use similar technology to get one over on the US.
Not only will Iran’s new crypto be much harder, if not impossible, for the US to shutdown, it will also be gold-backed.
So its value – in theory at least – should remain untouched… or even increase, as geopolitical tensions rise.
The question, though, is why on earth would anyone trust a centralised cryptocurrency issued by a country that has one of the worst reputations in the world?
Iran may say its new cryptocurrency is backed by gold. But you can bet no one impartial is going to be allowed to examine its vaults.
And, as this will be a completely centralised cryptocurrency, the Iranian government will have complete control over it. It will be able to blacklist addresses, reverse transactions and increase or decrease the supply at will.
Still, it’s a pretty shrewd move by Iran, and if it all goes ahead it’s sure to irk the US no end.
This wouldn’t be the first time a questionable government regime has launched its own cryptocurrency
This Iran episode has echoes of what Venezuela tried last year.
In an effort to get around US sanctions, in December 2017, Venezuela announced it would be issuing its own cryptocurrency.
The Petro (PTR) as it was called, would be backed by gold, diamonds and the country’s vast oil reserves.
At the time Venezuela was famously facing hyperinflation, which was, and still is, ruining its citizen’s lives. And the Petro was announced as a good way to solve the problem.
From Coin telegraph:
At the start of January 2018, President Maduro ordered the issuance of the first 100 million Petros, announcing that each Petro will be pegged to the value of one barrel of Venezuelan oil — equating the cryptocurrency’s capitalization to roughly $5.9 billion. Several days later, the opposition-run National Assembly criticized Petro, calling the digital currency “null and void.” Parliamentary Deputy Jorge Millan described Petro as fraudulent, stating: “This is not a cryptocurrency, this is a forward sale of Venezuelan oil. It is tailor-made for corruption.”
Venezuela launched the presale for Petro on Feb. 20, 2018. 82.4 million Petros were made available in exchange for select fiat currencies and cryptocurrencies. Three days later, Venezuelan media claimed that the presale had raised $1 billion.
Things were going pretty well for the corrupt regime, until the US Treasury Secretary Steven Mnuchin issued this warning:
“President Maduro decimated the Venezuelan economy and spurred a humanitarian crisis. Instead of correcting course to avoid further catastrophe, the Maduro regime is attempting to circumvent sanctions through the Petro digital currency — a ploy that Venezuela’s democratically-elected National Assembly has denounced and Treasury has cautioned U.S. persons to avoid.”
Still this didn’t stop the Venezuelan regime from viciously promoting the Petro to its citizens.
For example, in October 2018, it announced that passport applications could now only be paid for with Petros.
But the move that grabbed the most headlines was its decision to convert people’s pensions into Petros.
Again from Coin Telegraph:
During December 2018, the Venezuelan government moved to automatically convert its pensioners’ monthly bonuses into Petro. According to Caracas Chronicles, pensioners’ government payouts were withdrawn and converted into Petro after initially being deposited into fiat accounts hosted by government web portal patria.org.ve on Dec. 7, 2018.
Crypto, like any tool or technology, can be a double-edged sword.
In the hands of the good it can increase people’s autonomy and freedom. In the hands of the bad, it is a perfect weapon of oppression.
This is also why Facebook’s announcement of Libra has drawn so much ire.
No one, it seems, wants to hand a company like Facebook the financial power of a nation.
The interesting thing will be when “good guy” countries like the US and UK inevitably decide to issue their own government-backed cryptocurrencies.
Ironically, a move like that could be what ultimately makes the public move into truly decentralised, incorruptible cryptocurrencies like bitcoin and Ethereum. Wouldn’t that be a turn-up for the books?
Until next time,
Editor, Exponential Investor
PS As you can see from today’s piece, cryptocurrencies are already having a big impact on the world stage. They are not only disrupting finance and other legacy industries, but politics itself.
If you’d like to get clued up on crypto, I can highly recommend Sam Volkering’s book, Crypto Revolution. It covers everything you could ever want to know abo the history, current trends and future of the crypto industry – as well as how to invest in it. Grab your copy here.