The Geopolitics that will end the PetroDollar

The surge of crypto-assets and blockchain technology heralded the end of the PetroDollar. Recent insights in this transition -from atoms to electrons- show governments they need to act accurate and promptly or get left behind. Around the world jurisdictions such as the USA, Russia, Asia and the EU respond very different, as they try not to panic and react responsible.

As data swiftly becomes the primary asset in modern societies it is surpassing the importance of physical oil based assets; A remnant from the previous industrial age. With this shift a new base bearer instrument has sprung up: decentralised digital assets, known as cryptocurrencies. According to Vladimir Putin, governments around the world are required to act informed and swiftly as those late to the race will lose independence to the leading nations of the blockchain space. Misinformed government officials, when asked, remain sceptical about cryptocurrencies and the inseparable distributed ledger technology as they oftentimes struggle with the basic underlying concepts and opportunities of decentralised governance. Its positive implications on politics and society are often overseen or misunderstood through careless reporting of the traditional media.

For the past years this led to the slow buildup of a perceived conflict of interests between citizens and governments around the world as many governments focused on the negative aspects of the technology such as possible money laundering and energy consumption that can be perceived as high. In the past few weeks a significant amount of uncorrelated occurrences show a strong shift in the receptivity of cryptocurrencies among world leaders and influential decision makers from the Middle East, Asia, Europe, the United States of America and Russia.

The end of the PetroDollar

As data swiftly becomes the primary asset in modern societies it is surpassing the importance of physical assets. With this phenomenon electric energy becomes more important than kinetic energy. This results in a seismic shift with which oil is being replaced by electricity as the preferred transport-medium for energy. As millennials no longer prefer the physical above the digital, the core need for goods and services based on atoms are being replaced by goods and services based on electrons.

what cryptocurrency is, is essentially the tokenization of electrons, as opposed to petroleum molecules and it is becoming a reference storage for all the things that are useful in your life.

This is also why eight-year-olds of our time prefer a digital sword within a virtual gaming-environment above a ‘real-life’ sword carved from wood. With a fundamental transition in society like this, the primary bearer instrument, money, tends to change as well.

At MENA, the summit of the Milken institute, Bill Tai, a venture capitalist and founder of multiple successful tech companies, explained it concisely: “When the United States of America introduced the US Dollar what happened was basically the tokenization of oil.”. By forcing the people to denominate trade in US Dollars the PetroDollar was coerced as a energy security that countries then could use to store capital that can be traded with oil at a later date.

At the time that was a sound idea. But when we look at it today, electricity became more important than oil as a consequence of the 4th industrial revolution. The outcome of the previous technological revolution made the movement of machines, and therefore oil, fundamental to peoples lives. Today it is all about electric cars and software, therefore electricity has become more important than oil, as it is perceived as the lifeblood of all of our lives today, more than oil. Today environmentalists even make sure oil has a certain bad connotation with is produce. “I think what cryptocurrency is, is essentially the tokenization of electrons, as opposed to petroleum molecules and it is becoming a reference storage for all the things that are useful in your life.”, Mr Tai explained. This is why the core mechanism that ensures the trustworthiness of blockchain technology, Proof-of-Work, is a key aspect of the success of the blockchain revolution.

With the establishment of the PetroDollar westerners forgot to involve less fortunate societies in the global marketplace, leaving the inhabitants of these nations behind in poverty. With the increase of the popularity of crypto-assets and the technology becoming scalable there’s a chance for the millennial generation to put things right.

The economics of cryptocurrencies

The end of the PetroDollar relates to the question why Bitcoin and the adoption of other crypto-assets resulted in a price-increase so fast. With the insight regarding the replacement of our reference storage of energy the answer becomes clear. In the nineties the baby-boomers caused the stock market to boom. Their savings went into stocks, causing the market to rise to unprecedented heights. After that, generation X did not power the stock market much higher. When this new generation could spend the extra savings, they were found to like hedge funds better.

As millennials no longer prefer the physical above the digital, the core need for goods and services based on atoms are being replaced by goods and services based on electrons.

Where will the trillions of savings from the next generation, the millennials, go to? According to Thomas Lee , co-founder of fundstrat, a New York based financial strategy research boutique, the millennials love blockchain and cryptocurrencies and therefore will buy crypto-assets, not the financial instruments their parents fell in love with. In his keynote, at the Upfront Summit of this year, Mr. Lee mentioned millennials were the ones buying bitcoins during the first price increase of the past years.

The vision of Mr Lee fits previous ideas on the subject, such as the 10.000 year view of Willy Woo:

Image by Willy Woo @woonomic
10.000 year view on cryptocurrency. Image by Willy Woo @woonomic

For many Xennials working in the blockchain space for multiple years now, like myself, this is not all that new. Most of us lost interest in traditional asset classes after the financial crisis and the way most authorities responded. Millennials react similarly by investigating and experimenting with digital assets as they start working their way out of the situation that has arisen, mostly without approval of the incumbents of previous generations. Recently an interesting turn of events regarding these vested institutions has started to fan-out across the entire globe.

United States of America

Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC) in the USA, explained on multiple occasions the current focus on simplifying rules and regulations by making them less complex, less costly and less burdensome for small businesses. Especially his hands-off approach towards new innovations is laudable. On cryptocurrency and blockchain technology he expressed his supportive views: “We owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”. This future-oriented mindset of the people in charge of the USA is combined with a healthy scepticism regarding the expediency of current regulation within the financial markets.

In 2017 the mantra we heard way too many times was: “It is not Bitcoin but it’s the technology behind Bitcoin, the blockchain, that interests us.”. The discussion has clearly surpassed this nonsensical phase as the commission no longer refuted the notion of Mr. Giancarlo that blockchain can’t exist without a cryptocurrency.

During another hearing that examined pending rules, cryptocurrency regulation, and cross-border agreements, at the United States Senate Committee on Agriculture, Nutrition and Forestry, the chairman perpetuated his sound ideas on systemic risks in the current financial markets, ponzi schemes, a more safe financial sector and the use of cryptocurrency in illicit, fraudulent and abusive activities. At the commission the chairman was summarised with the acknowledgement “There’s a new sheriff in town.”. A trend seen among more leaders and influential people around the world.

Asia

Last year Japan became the frontrunner in the cryptocurrency and blockchain space with their substantial legalisation and regulation of the new asset class that digital assets or cryptocurrencies represent. Recently there were even rumours the Central Bank of Japan (BoJ) has started hoarding cryptocurrencies which still have not been invalidated.
The next big move from Asia comes from South Korea as officials started the process of legalising Bitcoin and Ethereum through a revision of the Electronic Financial Transactions Act.

Middle East

In the Middle East we see similar bold approaches regarding the adoption of blockchain and related digital assets. In the United Arab Emirates, Dubai wants to become the world’s first blockchain powered government. This is already more than a sheer ambition as the vision is becoming a reality. In a press statement Sultan Butti bin Mejren, director general of DLD explained: “Our aim is to unite all real estate and department services on a single platform”.
In other parts of the Middle East the need for sovereign infrastructure is more dire. Iran’s minister of information and communications technology, Mohammad-Javad Azari Jahromi, announced a state-run bank is working on developing a cryptocurrency as Iran is still mostly cut off from major international payment networks.

Europe

Mario Draghi, the president of the Central European Bank, pronounced “Blockchain is promising and can improve settlement processes. The European Union (EU) works with the BoJ to explore the possibilities and improve the technology.”. It is interesting the EU works with the most progressive central bank the world has regarding the nascent technology. Especially if we compare the concrete actions in Asia to the actions of the European Commission and related institutions. Although the EU shows a similar reversal to the USA with the remarks by vice-president Dombrovskis at the roundtable on Cryptocurrencies, the EU plans are rather slow and restricted to observations, monitoring, assesments and discussions about opportunities and challenges of cryptocurrencies. The focus is less concrete as goals describe mostly reports, later this and upcoming years. Concrete action is postponed to more than a year into the future as expert groups then start reviewing existing regulatory frameworks.

A Blockchain Observatory and Forum was launched by the European Commission to explore joint solutions across the EU for at least two years. Last week I was invited to one of the first meetings. The director for the Digital Single Market in Directorate-General “Communications Networks, Content & Technology”, Gerard de Graaf, mentioned the importance of the EU leading global developments in the blockchain and cryptocurrency space during his inspiring opening speech.
Separately there’s great momentum of ambitious and willing people and organisations at relevant positions across the EU. Whether the European governance-structure can keep up globally in this fast-paces industry remains to be seen, as this depends heavily on the way resources are dispensed and utilised. Only if the EU manages to refrain from inauspicious contesting member states the results of the combined efforts might weigh-in with similar efforts of other leading nations across the globe.

The United Kingdom is getting ahead of the curb regulatory-wise as Mark Carney from the BOE mentioned recently “Bringing crypto-assets into the regulatory tent, could potentially catalyse innovation”.

Within the EU the Dutch lead with respect to blockchain & cryptocurrency technology and innovation, together with some other member states. Meanwhile the Dutch authorities still react similar to the USA in the past years, before the current turn of events. Minister Wopke Hoekstra of Finance and the Dutch Authority for the Financial Markets (AFM), supervising the operation of the financial market, recently responded to the surge of the technology with the suggestion of a ill-considered ban. In this way the Dutch risk they fall behind as these newfangled markets remain unreliable for investors in the region, discharging sprouting businesses.

Those late to the race will become dependent -very fast- of leading nations that are ahead of the developments in the blockchain space.  – Vladimir Putin

Russia

The knee-jerk response from the once innovative Dutch authorities is at odds with the collected response from the Russian government. In the context of cryptocurrencies and blockchain the Russians can rely on decisive leadership from the highest echelons. In Russia the education of professionals is prioritised and combined with business invitations, and very careful regulatory action and legislation. Not only are prohibitions inconceivable, even mentions about prohibitions are ruled out.
Vladimir Putin was informed personally by magnates from the blockchain and cryptocurrency industry. Russian leaders understand it is driving innovative markets and know counterproductive regulation needs to be prevented at all cost. Recently Putin publicly demonstrated he understands the possibilities and the fact even Russia cannot remain focused on raw materials, such as Oil. He mentioned Russia needs this new technology in addition to its existing resources and emphasised those late to the race will become dependent -very fast- of leading nations that are ahead of the developments in the blockchain space. “Russia can not allow this” Putin finally added.

The divide

The developments will inexorably divide future-oriented nations from nations that fall behind. Even jurisdictions that are known today for their innovative culture and high-tech expertise, are at risk obliterating many opportunities of future generations due to careless decision-making.

We have seen that among the most influential leaders of the world, the race has started to generate as much as possible impact -in a very short amount of time- by leveraging blockchain technology. I sure hope countries with the right ethic and democratic principles become true leaders in the space and bring the developments further. Blockchain and decentralised digital assets offer many great opportunities for most people on earth; We may find ourselves having a duty not to forget the less fortunate nations, once again.


Also published on Medium.

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