The US currency is to face a crisis that is the strongest over the past several decades. Experts believe that other negative macroeconomic factors may overlap the classic 15-year cycle. In expectation of the turn for the worse, commodity investors are with an eye for virtual assets. Large players seem to be eagerly waiting for new financial and technological solutions that will allow them to get out of the dollar.
“The dollar will fall by about 40% in relation to the euro by 2024,” CEO of A.G. Bisset Associates LLC Ulf LINDAL predicts. “And this creates the riskiest climate for investors for 45 years.” According to the analyst, the fall of the dollar could lead to a sale of shares and a strong increase in commodity prices. At the same time, the trend for an increase in demand has not been observed yet; on the contrary, economists expect the global market to fall and, as a result, the demand for energy resources to decrease. World Bank (WB) experts are among the skeptics.
In 2018, global economic growth seems stable at 3.1%. However, negative macroeconomic factors, such as geopolitical instability, a decline in the credibility of traditional financial institutions, and a tightening of the monetary policies of developed countries will lead to a fall in the global GDP growth rates to 2.9% by 2020. Moreover, if one of the risk factors increases, then there is a chance that the development rates may fall to 2% or even lower. And this is the threshold of a global recession. The probability of such a result is low; WB experts estimate it at 21%. But the fact remains: such a result is possible, and the countries-suppliers and buyers of energy resources are preparing for it.
According to Carl WEINBERG, the chief economist and the executive director of High Frequency Economics, China is forcing Saudi Arabia to cross over to yuan in oil payments. Soon, the Celestial Empire will be in advance of the United States in terms of raw material purchases and will become a headline player in the market. Today, China accounts for 17.3% of oil exports, the European Union – for 27%, and the US - 16%.
“I believe that the price for oil in RMB is coming soon,” WEINBERG said. “And as soon as the Saudis accept it, the rest of the world will follow them.”
But it’s not all that simple. Beijing, of course, wants to strengthen its currency as a global reserve raw material asset and give it even greater liquidity. To do this, it will just have to create its own IMF, the World Bank, the Federal Reserve, and SWIFT in addition, as the entire institutional financial infrastructure is somehow controlled by the United States. This makes the use of the national currency in international payments highly problematic. For example, according to the calculations of that very SWIFT system, the share of world currency transactions in RMB is 2%, for comparison, in dollars – it is 40.47%.
All three, Washington, Beijing and Riyadh, know that while there is no alternative to the global financial network, when paying for oil, China will still have to convert yuan to dollars, on its territory or on someone's else, in order to pay for transaction costs, as well as for the rest of the imports. If the exchange takes place in the Chinese financial system, it will only lead to a deficit of dollars and an excessive strengthening of the yuan, which will affect production negatively.
Consequently, the world oil industry needs a new financial infrastructure with low transaction costs and independence from the United States. And here, the digital economy appears on the scene.
The DLT itself implies the decentralization of digital financial assets. It is also dangerous for the dollar economy. Washington-affiliated international financial institutions are doing everything possible to discredit digital coins and all related FinTech-solutions. But they do not succeed in black PR, the objective need for new transaction channels still remains.
“Blockchain is inexorably entering the commodity markets,” Blythe MASTERS, the ex-executive director of JPMorgan Chase & Co believes. In her opinion, this technology, compared with the current one, has a higher level of confidentiality, lower bureaucratic barriers, and better history and efficiency. “Blockchain technology has a huge potential for influencing the raw materials industry,” she said. “Already, dozens, if not hundreds, of projects are being implemented in this area.”
Our consultant Jason FERNANDES, the ICO expert agrees: “Blockchain can certainly optimize the supply chain in the oil industry. At the Shanghai Global Blockchain Summit in Shanghai last year, the oil and mining giant BHP Billton announced that it was using blockchain to improve the supply chain and secure the data generated during the delivery of raw materials to the consumer.”
Indeed, the logistics in the resources industry is very complicated. Each stage of delivery generates its own financial and legal relations between the participants, involves new counterparties, and adds value to each barrel of oil. A good example is Venezuela, which faced the problem of transporting its raw materials to the world's largest oil hubs. The task has not been solved yet, and the production of the only liquid asset in the country is decreasing every month.
“Smart-contracts can provide the ideal solution for reconciling information, tracking transactions between suppliers, contractors, and subcontractors. As well as oil tokens - this is a good idea,” FERNANDES believes.
At the moment, the market itself is creating a financial infrastructure for payments for oil supplies in digital coins. This process does not have a unified center; one cannot say that any particular country or company has become aware of creating a global blockchain network. This process is decentralized but no less effective. Each newly created distributed ledger can later be used for digital financial transactions. The appearance of this oil token won’t take long now.
And what about the Venezuelan el Petro? After all, the country's president, Nicolas MADURO, personally declared that each coin would be tied to the cost of a barrel of oil.
This is where the real intrigue lies. In fact, the raw material that supposedly secures this digital asset does not exist yet. There is a minefield where this oil lies, and there is a forecast for the volumes of its production - they are what Petro's value is based on.
“It is quite possible Venezuela does not even have the ability to pump out its oil,” – Jason FERNANDES says. – “And this means all the efforts to promote Petro are useless if not an outright fraud.“
However, in any case, Nicolas MADURO conducted an interesting experiment, the results of which can be the basis of a promising financial project.
What will it be like?
It is possible that the digital yuan will become the raw material unit of account: it is not for nothing that China is cleaning its market of third-party digital assets. Or it will be a universal virtual coin of the OPEC countries. But it will happen after the global financial crisis. According to the theory of evolution, useful mutations in living beings establish themselves best of all against the background of natural disasters. This is the general law of the nature improvement. The market is a living organism and develops according to the same laws.