Petrodollar crumbles with the rise of Cryptocurrencies

Petrodollar crumbles with the rise of Cryptocurrencies

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In the last 40+ years from the early 1970s, the oil trade brought in a great authority and power to the United States all thanks to the Petrodollar. This dominance has started to crumble with the introduction of crypto-currencies like Bitcoin, Litecoin and Namecoin to the market.

History

The “Bretton Woods Agreement” initially developed by the United Nations Monetary and Financial Conference and then put into action by President Nixon paved way for the petrodollar. Under this agreement the currencies were fixed to the value of gold and the United States dollar was connected to this gold value as a reserve currency. This action brought in financial unrest to the country as it was a time when U.S. was struggling with the debt incurred at the Vietnamese war. The war put a hole through the value of the dollar making it value much less and other world leaders from Britain, Germany and France started to doubt whether U.S. was fit enough to be the global economic leader anymore.

When the United States was stuck in this economical struggle known as the “Nixon Shock”, the economic problems were getting worse in other parts of the global due to political issues leading to the economic downfall. The Ramadan war (otherwise known as the Yom Kippur War), an attack on Israel carried out by Syria, Egypt and several other Arab nations, increased the oil prices drastically. United States stepped in by providing financial assistance and arms to support Israel in this war that lasted for 20-days.

Kuwait, Libya, Iran, Saudi Arabia, United Arab Emirates and Qatar joined together in 1960 to initiate the Organization of Petroleum Exporting Countries (OPEC), and all these countries were in opposition to the support provided by the U.S. to Israel. The OPEC imposed a complete ban on the oil export to nations that supported Israel. This meant countries such as United States, Japan, Canada, Britain, Netherlands, Portugal and South Africa did not receive oil from the OPEC countries. As a result, the oil prices were four times the usual market price by 1974. This led to Saudi Arabia having the leadership in OPEC countries, given they had complete influence over the oil prices.

The U.S. to solve this made agreement with Royal Family in Saudi Arabia to provide arms and assistance to protect oil fields, in return to do all transactions related to oil in U.S. currency. The U.S. Dollar in turn became the Petrodollar in 1975, when all OPEC nations obeyed this decision. This move initiated by President Nixon really gave a rise to the U.S. economy in leaps and bounds.

There were discussions among countries within the OPEC to move out of the petrodollar in the coming years, but they failed to do so. Russia encouraged China to buy oil in yuan and Japan to buy oil in yen as a move promoting change. However, this dominance of the petrodollar surviving through aggression and geopolitical conflicts among nations, is starting to show a downfall.

 

Introduction of Cryptocurrencies like Bitcoin to the market

In 2014, the Gulf Cooperation Council was put forward a proposition by a financial institute in Kuwait, to use bitcoins as the trading currency for oil. The institution further elaborated the advantages of using a cryptocurrency for a more efficient transaction. There were discussions on this concept, based on the topic of “petro-bitcoin” that will allow to have a decentralized currency without any impact from any government. This would allow to have a world-wide mode to do business within a justified blockchain system.

Iran started oil trade using Yuan in 2012, as a move by China to stand against the petrodollar, which Venezuela followed. Saudi Arabia was forced to use yuan when interacting with china with China’s own crude oil benchmark, the petro-yuan.

Russia wanted to allow free exchange around the crypto-ruble the ruble. So, to remove any dynamic dependencies on foreign currency, Russia created a gold based cryptocurrency. This cryptocurrency governed by Russia, is similar to the Russian Miner Coin, was introduced with the intention of improving the local economy. It is reported Vladimir Putin has discussions with Ethereum Alliance and WAVES to build up an open source blockchain platform.

The crypto-yuan and crypto-ruble could strongly affect the U.S. dollar pushing the U.S. economy down the drain. The force put in by Russia and China has impacted the global economy and has given rise to so many new challenges in a geopolitical aspect. All these changes have resulted in the drop of the petrodollar and allowed rapid growth of cryptocurrencies, which will be more evident in the near future.

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