The freezing of Russia’s foreign assets and the new monetary regime based on gold and Bitcoin


The current monetary regime of the world effectively ended with the freezing of Russian foreign reserves by Western governments on February 26. In the new era, central banks will no longer place their reserves in Western fiat currencies and instead turn to gold and Bitcoin (BTC) according to the former CEO of BitMEX, Arthur Hayes, in a lengthy essay published Thursday titled “Energy Canceled“.

Source: AdobeStock/AStakhiv

Hayes believes that when countries around the world see what has happened to Russia’s reserves, they will no longer want to place their reserves in currencies controlled by foreign governments.

He added that in future historians will regard February 26 as “the date when this system ended and a new system, now unknown to us, came into being.”

“A new neutral reserve asset, which I believe will be gold, will be used to facilitate global energy and food trade,” Hayes said.

He also explained that countries around the world “appreciate the value of gold” from a “philosophical point of view.” Bitcoin, however, isn’t there yet — at least not in the West, the former CEO said.

“Human civilization is around 10,000 years old, and gold has always had its place as a monetary instrument. Bitcoin is less than two decades old. But don’t worry: if gold succeeds, so will Bitcoin,” said Mr Hayes.

Referring to two widely shared articles from The Wall Street Journal and Bloomberg that discussed the implications of the Russian central bank’s reserve freeze, Hayes said the shift in global perception of the US dollar as a trusted asset “is so obvious” that even the mainstream financial press “fully understands what happened.”

“[…] Rational countries with a capital account surplus must now save in another currency,” Hayes said.

The key countries in this regard are the largest “surplus countries”, i.e. countries that export more than they import. Of these, China is the biggest, Hayes said, referring to a World Bank ranking of countries with the largest current account balances.

Largest surplus countries:

Source: World Bank

According to Hayes, China will not trade internationally using gold or other commodities. Instead, it will continue to accept fiat currencies, before immediately exchanging them for a physical asset.

He went on to explain how this was going to play out in the gold market, saying that the price of gold was going to “gradually change multiples from where it is today”, and that the competition between bidders would “push the latest marginal price well beyond $10,000” over the next decade.

And if gold remains the preferred asset of central banks around the world, Hayes argued that Bitcoin will also benefit.

“As gold heads towards $10,000, Bitcoin will head towards $1,000,000. The bear market in fiat currencies will trigger the biggest transfer of wealth the world has ever seen.”

The convenience of Bitcoin

Meanwhile, commenting on the current cycle of rising interest rates that the Federal Reserve (FED) began, Hayes called it “a theatrical performance on rising nominal rates.”

“Don’t get distracted, these are all real rates first and foremost. And they must mathematically remain negative for many years to come,” Hayes wrote, referring to the interest rate received after adjusting for inflation.

Hayes repeatedly referred to concepts from a recent note from the strategist of the Swiss credit, Zoltan Posar, regarding “inner money” and “outer money”. Only money that is actually controlled by its owner, such as physical gold or bitcoin held in “non-custodial” wallets, can be considered outside money, Hayes argued.

Furthermore, the former trader and CEO of the stock exchange also claimed that there is no reason other than “historical precedent” for central banks to buy gold instead of Bitcoin. In fact, that’s likely to change over time, Hayes said, arguing that “some central banks might get tired of shipping gold around the world to pay.”

“They would prefer to do a low but growing volume of transactions in a digital currency, which naturally would be Bitcoin.”

He added that the move to Bitcoin would happen faster for the group of countries sometimes referred to as “the Global South”, which to a large extent “lacks the capacity and access to exchange and store the or effectively.”

“El Salvador has opened the door to this possibility, and many are watching how bitcoinification of their reserves helps or hurts their economy,” Hayes wrote, before finally arriving at his price prediction:

“For a single bitcoin, my unit is in the millions. For an ounce of gold, my unit is in the thousands.” […] “In the medium term, it’s time to back off the John Deere digger and scoop up as much gold and bitcoin as you can afford,” Hayes concludes.

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