Russian President Vladimir Putin seems to be looking at legalizing and regulating crypto-currencies such as Bitcoin. Just last year Russia was considering criminal penalties for those who use these currencies, but this hostile attitude towards the alternative currencies seems to be changing. Why?
One reason would be the desire to introduce an alternative world reserve currency which is not dominated by any one country. Reserve currencies are held by governments for use in international trade and to prop up their currency values while buffering volatility. The “home” countries of reserve currencies benefit from lower borrowing costs (the estimate benefit for the U.S. is $100 billion per year). Currently, the U.S. dollar is the dominant reserve currency, representing about 64% of foreign exchange reserves; the Euro follows with 20%; the British Pound Sterling, Japanese Yen, and Chinese Yuan Renminbi round out the top 5 reserve currencies. In short, America can afford to go into trillions of dollars in debt, and buy foreign goods cheaply, because countries desire the dollar as a foreign exchange reserve.
However, some countries view American economic dominance as a threat. In fact, Russia proposed a world currency in 2009 in order to get away from any one country dominating the world economy. This effort went nowhere, but Bitcoin may provide such an opportunity. In fact, others are already predicting that Bitcoin will be the 6th reserve currency by 2030.
Bitcoin utilizes a technology called blockchain which features a secure, immutable, decentralized method to record transactions. Thus, no one country – or entity – could control Bitcoin, and there is no central authority required to manage the transactions. For this reason, blockchain technologies are becoming an increasingly important future plank of financial institutions and technology companies. Putin is couching his support for Bitcoin in these terms, but it is clear that a side-effect will be the erosion of the dominance of the U.S. dollar in the world economy.