Oil contracts settled in Bitcoin?
As the Middle East crisis continues to unfold with its current focus on Iran and Iraq, the U.S. have warned Iraq that its vote to expel U.S. troops would lead to Iraq losing its access to a bank account. Like other countries, Iraq maintains central bank accounts at the Federal Reserve Bank of New York in order to manage e.g. their oil sale revenue. The US have created a global oil-trading system that is denominated in US dollars, hence, no access to the aforementioned bank account would imply a severe economic hit to Iraq. This is because oil constitutes over 65% of their GDP and 90% of their government revenue, according to the World Bank reports for 2018.
The cryptocurrency bitcoin has been developed with the purpose of enabling financial transactions with censorship resistance. The resistance is facilitated by the currency not having one central authority governing its monetary policy or payments. Instead, it is decentralised in its organisational and operational structure, meaning that it is a network of servers running an open-source code, where every server – or “node” – enjoys equal rights.
Given the fact that the US are making use of their power as a central authority in international oil settlements by issuing said threat, voices are being raised to settle prospective oil contracts in the neutral currency bitcoin.
Critical responses with regards to the bitcoin network include the immense energy consumption for its maintenance, i.e. the execution of the code validating the transactions which take place on the bitcoin blockchain. The validation process consumes such large amounts because it is a competitive process in which every time a fixed number of transactions are facilitated, the server having achieved this is rewarded in bitcoin itself.
This is what is called “mining”, and it guarantees the impartiality of the network, even though it implies more and more energy will flow into the bitcoin network as it gains in value over time.
Additional to the impartiality – which is widely referred to as “trust minimisation” – is that countries with access to energy resources will have a competitive advantage at mining bitcoins. This means that exactly the countries which are now being censored, can trade and settle their oil in bitcoins in the future, and simultaneously contribute to maintaining the network.
At least two aspects need to be considered to evaluate future developments. One is that such a new system requires appropriate infrastructure, not only technological but also legal. The Future Citizen Institute (FCI) has already provided overviews over the legal status quo of the blockchain technology in several countries in Europe. A blockchain is the dynamic and peer-to-peer database on which the bitcoin network is built. The FCI has also provided overviews over institutional-scale infrastructure for financial bitcoin products, such as future contracts, which has been built by the New York Stock Exchange’s mother company ‘Intercontinental Exchange’.
Furthermore, as the U.S.’ influence in global oil markets has produced and maintained a North Atlantic system of governance, such an attempt of rebuilding the structures of oil trade can be deemed a risky endeavour for all participants. Strong shifts in power dynamics are known for creating “power vacuums”, which create novel power distributions, e.g. a new set of hegemonial states.
Finally, the continuous price volatility of the bitcoin is a strong indicator for the amount of information that is being processed by investors and traders presently. The FCI will make sure to follow-up on future developments around the topic.
Edited by: Patrick Lehner