Introduction
Currency is one of the most profound and consensus-building inventions in the process of human civilization. From barter to metal currency, from the gold standard to sovereign credit currency, the evolution of currency has always been accompanied by changes in trust mechanisms, transaction efficiency and power structures. Today, the global monetary system is facing unprecedented challenges: currency over-issuance, trust crisis, sovereign debt deterioration and geo-economic shocks caused by the hegemony of the US dollar.
The birth of Bitcoin and its continued expansion of influence have forced us to rethink: What is the essence of currency? What form will the future "value anchor" take?
"The revolutionary nature of Bitcoin lies not only in its technology and algorithm, but also in the fact that it is the first 'bottom-up' monetary system in human history that is driven by users and is challenging the millennium paradigm of state-led currency issuance."
This article will review the historical evolution of currency anchors, criticize the dilemma of the current gold reserve system, analyze the economic innovation and limitations of Bitcoin, explore the thought experiment of Bitcoin as a future value anchor, and look forward to the possible multiple evolution paths of the global monetary system.
I. Historical Evolution of Currency Anchors
1. Barter and the Birth of Commodity Currency
The earliest economic activities of mankind mainly relied on the "barter" model. The two parties to the transaction must have exactly the items that the other party needs. This "coincidence of double needs" greatly restricted the development of production and circulation [1]. To solve this problem, commodities with universally accepted values (such as shells, salt, livestock, etc.) gradually became "commodity currencies", laying the foundation for the later precious metal currencies.
2. Gold standard and global settlement system
In civilized society, gold and silver became the most representative general equivalents due to their natural properties such as scarcity, easy division and difficulty in tampering. Ancient empires such as ancient Egypt, Persia, Greece, and Rome all used metal currencies as symbols of national power and social wealth.
By the 19th century, the gold standard was established globally, and the currencies of various countries were linked to gold, achieving the standardization of international trade and settlement. England formally established the gold standard in 1816, and other major economies gradually followed suit. The biggest advantage of this system is that the "anchor" of currency is clear and the trust cost between countries is low, but it also caused the money supply to be limited by gold reserves and difficult to support the expansion of industrialization and globalized economy (such as the "gold shortage" and deflation crisis) [2].
3. The rise of credit currency and sovereign credit
In the first half of the 20th century, the two world wars completely impacted the gold standard system. In 1944, the Bretton Woods system was established, with the US dollar pegged to gold, and other major currencies pegged to the US dollar, forming the "dollar standard". In 1971, the Nixon administration unilaterally announced the decoupling of the US dollar from gold, and global sovereign currencies officially entered the era of credit currency. Countries issue currencies based on their own credit and regulate the economy through debt expansion and monetary policy.
Credit currency brings great flexibility and economic growth space, but it also lays the hidden dangers of trust crisis, hyperinflation and excessive money supply. Third world countries have repeatedly fallen into local currency crises (such as Zimbabwe, Argentina, Venezuela, etc.), and even emerging economies such as Greece and Egypt are struggling with debt crises and foreign exchange turmoil[2].
II. The Real Dilemma of the Gold Reserve System
1. Concentration and Opacity of Gold Reserves
Although the gold standard has become history, gold is still an important reserve asset on the balance sheets of central banks of various countries. Currently, about one-third of the world's official gold reserves are stored in the vaults of the Federal Reserve Bank of New York, USA. This arrangement stems from the trust of the international financial system in the US economic and military security after World War II, but it also brings significant problems of concentration and opacity.
For example, Germany once announced that it would transport part of its gold reserves back to its home country from the United States. One of the reasons was the distrust of the US vault accounts and the long-term failure to conduct on-site inventory. Whether the vault accounts are consistent with the actual gold reserves is difficult for the outside world to verify. In addition, the proliferation of derivatives such as "paper gold" has further weakened the correspondence between "book gold" and physical gold.
2. Non-M0 attributes of gold
In modern society, gold has long lost the attributes of daily circulating currency (M0). It is impossible for individuals and enterprises to directly settle daily transactions with gold, and it is even difficult to directly hold and transfer physical gold. The main role of gold is more as a settlement between sovereign states, bulk asset reserves and financial market hedging tools.
International gold settlements usually involve complex clearing processes, long time delays and high security costs. Moreover, the transparency of gold transactions between central banks is extremely low, and account checking relies on the trust endorsement of centralized institutions. This makes the role of gold as a global "value anchor" increasingly symbolic rather than real circulation value.
III. Bitcoin’s Economic Innovation and Real Limitations
1. Bitcoin’s “Algorithmic Anchoring” and Currency Attributes
Since its birth in 2009, Bitcoin’s characteristics of constant total volume, decentralization, and transparent and verifiable nature have triggered a new round of thinking about “digital gold” around the world. Bitcoin’s supply rules are written into the algorithm, and the total upper limit of 21 million coins cannot be changed by anyone. This “algorithmic anchoring” scarcity is similar to the physical scarcity of gold, but is more thorough and transparent in the global Internet era.
All Bitcoin transactions are recorded on the blockchain, and anyone in the world can publicly verify the ledger without relying on any centralized institution. This attribute, in theory, greatly reduces the risk of “book value not matching the physical object” and also greatly improves the efficiency and transparency of clearing and settlement[3].
2. Bitcoin's "bottom-up" diffusion path
Bitcoin is fundamentally different from traditional currencies: traditional currencies are issued and promoted by state power "from top to bottom", while Bitcoin is adopted spontaneously by users "from bottom to top" and gradually spread to enterprises, financial institutions and even sovereign states.
Users first, institutions later: Bitcoin was first adopted spontaneously by a group of crypto technology enthusiasts and libertarians. With the strengthening of network effects, rising prices and expanding application scenarios, more and more individuals, enterprises and even financial institutions have begun to hold Bitcoin assets.
Passive adaptation by countries: Some countries have designated Bitcoin as legal tender, and some countries have approved Bitcoin-related financial products, allowing institutions and the public to participate in the Bitcoin market through compliant channels. Bitcoin's user base and market acceptance have driven sovereign states to passively embrace this new form of currency.
Global borderless expansion: Bitcoin's network effect has broken through sovereign boundaries. Whether in developed countries or emerging markets, a large number of users have spontaneously adopted Bitcoin in their daily lives, asset reserves and cross-border transfers.
This historic shift shows that whether Bitcoin can become a global currency no longer depends entirely on the "approval" of the state or institution, but on whether there are enough users and market consensus.
Enlightenment on the future monetary landscape:
-Possible separation of power and currency: Currency is no longer necessarily dependent on state power, but can be attributed to the Internet, algorithms and global user consensus.
-State support becomes "icing on the cake": Whether Bitcoin can become a global currency no longer depends entirely on the legislative support of state institutions, as long as there are enough users and social recognition.
-New sovereign challenges: Sovereign states may have to adapt to or even passively accept the impact of "user-autonomous currency" in the future.
Criticism and speculation:
-Limitations and risks of user autonomy: Without sovereign endorsement, how to manage risks such as extreme volatility, governance difficulties, and "black swan" events?
-Can "bottom-up" cope with global crises? When faced with systemic financial crises or large-scale technological attacks, is a monetary system without central coordination more vulnerable?
-Redistribution of power: Is Bitcoin really "decentralized"? Or will new oligarchic centers emerge?
3. Realistic limitations and criticisms
Although Bitcoin is revolutionary in theory and technology, it still has many limitations in real applications:
-Large price fluctuations: Bitcoin prices are extremely susceptible to market sentiment, policy news and liquidity shocks, and the short-term fluctuation range is far greater than that of sovereign currencies.
-Low transaction efficiency and high energy consumption: The Bitcoin blockchain processes a limited number of transactions per second, the confirmation time is long, and the proof-of-work mechanism consumes a lot of energy.
-Sovereign resistance and regulatory risks: Some countries have adopted a negative or even suppressive attitude towards Bitcoin, leading to the differentiation of the global market.
-Unequal distribution of wealth and technical barriers: Early Bitcoin users and a few large users control a large number of Bitcoins, and wealth is highly concentrated. In addition, ordinary users need a certain technical threshold to participate, and are susceptible to risks such as fraud and loss of private keys.
IV. Similarities and differences between Bitcoin and gold: a thought experiment as a future value anchor
1. Historical transition in transaction efficiency and transparency
In the era when gold was a value anchor, international bulk gold transactions often required the use of airplanes, ships, armored vehicles, etc. for physical transfers, which not only took days or even weeks, but also required high transportation and insurance costs. For example, the German central bank once announced that it would transport its gold reserves back to its home country from overseas, and the entire plan took many years to complete.
More importantly, the global gold reserve system has serious account opacity and inventory problems. The ownership, storage location, and actual existence of gold reserves can often only rely on unilateral statements from centralized institutions. Under this system, the cost of trust between countries is extremely high, and the robustness of the international financial system is constrained.
Bitcoin deals with these problems in a completely different way. The ownership and transfer of Bitcoin are recorded on the chain, and anyone in the world can verify it in real time and publicly. Whether it is an individual, a company or a country, as long as they have a private key, they can allocate funds at any time, without physical transfer or third-party intermediaries, and it only takes tens of minutes for global accounts to arrive. This unprecedented transparency and verifiability gives Bitcoin efficiency and trust foundation in bulk settlement and value anchoring that gold cannot achieve.
2. The "role layering" concept of value anchoring
Although Bitcoin far exceeds gold in transparency and transfer efficiency, it still faces many limitations in daily payments and small-amount circulation links - transaction speed, handling fees, price fluctuations and other issues, making it difficult to become a real "cash" or M0.
However, referring to the theory of currency stratification such as M0/M1/M2, it is conceivable that the following structure will appear in the future monetary system:
- "Anchors" such as Bitcoin serve as value storage and bulk settlement tools at the M1+ level, similar to the status of gold in central bank assets, but more transparent and easier to liquidate.
- Stablecoins, second-layer networks (such as Lightning Network), sovereign digital currencies (CBDCs) based on Bitcoin, etc., undertake daily payment, micropayment and retail settlement functions. These "sub-currencies" are anchored to Bitcoin or issued under its guarantee to achieve the unity of circulation efficiency and value stability.
- Bitcoin has become the "general equivalent" and "unit of measurement" of social resources and is widely recognized by the global market, but it is not directly used for daily consumption, but as the "ballast stone" of the economic system like gold.
This hierarchical structure can not only use the scarcity and transparency of Bitcoin as a global "value anchor", but also meet the convenience and low-cost needs of daily payments with the help of technological innovation.
V. Possible evolution and critical thinking of the future monetary system
1. Multi-level, multi-role monetary structure
The future monetary system is likely to no longer be dominated by a single sovereign currency, but a three-layer coexistence of "value anchor-payment medium-local currency", with cooperation and competition in parallel:
-Value anchor: Bitcoin (or similar digital assets) as a decentralized global reserve asset, assumes the role of "high-level currency" such as cross-border settlement, central bank reserves, and value hedging.
-Payment medium: Stablecoins, sovereign digital currencies, lightning networks, etc., anchored to Bitcoin or sovereign currencies, to achieve daily circulation, payment and pricing.
-Local currency: Each country's local currency continues to assume the function of regulating and managing the local economy, and achieves taxation, social welfare and economic policy goals.
Under this multi-layer structure, the three functions of currency (medium of exchange, value scale, and value storage) will be more clearly divided among different currencies and levels, and the risk dispersion and innovation capabilities of the global economy will also be improved.
2. New trust mechanism and potential risks
But this new system is not without risks. Can algorithms and network consensus truly replace national sovereignty and the credit of central institutions? Will the decentralized characteristics of Bitcoin be eroded by computing power oligarchs, protocol governance loopholes or technological advances? Regulatory differences, policy conflicts, and "black swan" events around the world may all become destabilizing factors for the future monetary system.
In addition, sovereign states may restrict the expansion of Bitcoin through strong regulation, taxation, and technological blockades in order to safeguard their own interests. Whether Bitcoin can truly achieve global consensus and maintain its status as "digital gold" in the "bottom-up" path still needs time to test.
Conclusion and open questions
Looking back at the evolution of currency, from barter to gold standard and then to credit currency, each change of "anchor" is accompanied by a profound change in trust mechanism and social organization. The emergence of Bitcoin has for the first time shifted the "value anchor" from physical resources and sovereign credit to algorithms, networks and global user consensus. Its "bottom-up" diffusion model, transparent and verifiable ledger, and global network effect provide a new thought experiment for the future monetary system.
However, the road to the Bitcoin revolution is not a smooth one. Issues such as price fluctuations, governance difficulties, regulatory risks, and technical barriers need to be addressed urgently. Whether Bitcoin can eventually become the "value anchor" or "general equivalent" of the global monetary system depends not only on technological innovation and user consensus, but also on the reshaping of the global economic, social and political structure.
Open questions:
- If not Bitcoin, what will be the future value anchor?
- How will the ultimate trust foundation of currency evolve?
- What kind of balance will the future global value system move towards between state power, user autonomy, and algorithmic governance?
As we continue to chase the next outlet in the new narrative and technological wave, perhaps the most worthy of attention are those seemingly "simple" but most essentially penetrating innovations. Bitcoin, as a monetary experiment in the Internet age, deserves our continued in-depth thinking.
Appendix/Notes
1. [1] Carl Menger, The Origin of Money
2. [2] Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Oxford University Press, 1992.
3. [3] Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System", https://bitcoin.org/bitcoin.pdf
Hui Xin
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