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Lessons from Roosevelt for the Bitcoin revolution
The digitalization of trust has far-reaching implications for the global financial system
3 Jun 2021 | Yves Bonzon

The development of digital assets is continuing at a dizzying pace. Although there are more than 6,000 cryptocurrencies, Bitcoin is the pioneer in this space and it has achieved a unique status among converts to digital gold. Its market capitalization has reached one trillion dollars, accompanied by sensational headlines and some impressive records. Today, more than 70% of holders of Bitcoin own fewer than 0.01 units, not counting those who hold their Bitcoin in regulated markets, such as Coinbase or Kraken, who account for another 15%.

For the very young and some conspiracy theorists, this cryptocurrency plays an active role as a haven from the monetary alchemists who currently run the central banks. Like gold, it cannot be printed by governments and it causes problems in terms of storage. In effect, Bitcoin, this cult object, can be viewed as digital gold. Indeed, the data show that the proportion of long-term buyers of Bitcoin is growing at the expense of those investing with the simple aim of trading.

Digitalization of trust

The popularity of Bitcoin obscures a number of more important trends that will lead to major economic changes over the next two decades. First, the performance of Bitcoin and other cryptocurrencies has been connected with the excess liquidity on the markets. In this respect, we believe that the tipping point of monetary stimulus measures has already been reached, and that we have probably already seen the peak values of risk assets. The fact is that cryptocurrencies are especially vulnerable to a fall in liquidity, which makes sense because the process increases the value status of fiat currencies.

But more important than this is the ability of Bitcoin to digitalize trust thanks to the encryption technologies based on blockchain. Only recently have we begun to understand the implications of this and the potential applications. Some even believe there will be a new global financial system, one that is decentralized and that works with independent and autonomous protocols, allowing for commercial, lending and insurance processes. This would lead to disruption for regulated financial institutions, as it would offer an open service with zero marginal costs.

In this way, so the theory goes, we would be liberated from governments and their monetary monopoly. One of the main arguments that supports this thesis is that no one can close or intervene in the cryptocurrency universe, as this would entail shutting down the entire internet. Governments would see their monetary monopoly destroyed by alternative currencies that are beyond their reach. On this point we disagree, and I believe that history can serve as a guide here.

The lesson of Roosevelt: monetary erosion

During the Great Depression at the beginning of the 1930s, the US administration of Franklin D. Roosevelt made a decisive shift in its policy when it decided to decouple the dollar from gold, creating a successful relationship and ending the crisis. As part of these exceptional measures, President Roosevelt issued an executive order that prohibited individuals from holding gold.

Simple and effective. An individual could have gold, but in doing so he or she would be committing a crime. Gold can be sold on the black market for dollars, but it is obviously much more complicated to hold prohibited digital money in a portfolio that is not regulated, such as an encrypted archive on a computer.

In summary, in the discussion about Bitcoin, the most interesting aspect is the possibility of digitalizing trust thanks to blockchain technology. We have only just begun to understand its implications and the applications this revolution will yield in terms of the way contracts are concluded, traded and acquired. With respect to the possibility of an independent financial system, politicians love to hate the financial industry, but the reality is that it is highly useful, including for them. In the end, as Roosevelt taught us, digital gold cannot be erased, but like its physical ancestor, it can be prohibited.

Yves Bonzon is the group chief investment officer of Julius Baer.