Why aren't people talking about BRICS & Bitcoin?

Welcome to our Sunday long form where I take you through a topic I’ve been thinking about through the week

If there's one thing I've learned, it's that change is the only constant.

When a system has been in place for a long time, people often forget that the system itself can change. Remember, the biggest winners from an investment or founder perspective are those who spot contrarian trends before they become obvious.

One of the most significant examples of this right now is the paradigm shift in monetary systems. We are witnessing BRICS challenging US dollar hegemony in global international settlements, which could completely change the game for payments.

Question is - How do you play this from a VC and a founder perspective?

I’ll walk you through below my thinking on the historical context of USD weaponization, what BRICS is doing with crypto, and opportunities for VCs & founders…

How the USD Reserve Status is Weaponized:

If we look across historical periods of currency dominance, there are two main ways countries leveraged its reserve status:

• Opening new markets for easier trade (e.g., UK and their empire in 1800s)

• Lower borrow costs leading to more competitive debt driven growth

However, the US has added two additional tools to its arsenal in its era of USD reserve dominance:

1. Ability to sanction countries unilaterally: Because money flows digitally now, the US uses systems like the SWIFT network to control any transactions using USD. The dollar clearing system enables the settlement of transactions in U.S. dollars, leveraging correspondent banking relationships and centralized clearing houses like CHIPS and Fedwire (aka, the US can control USD flowing around the world).

2. Ability to print money: The US deviated from a gold backed USD policy in the 1900s (explicitly in 1971). For monetary policy, this means politicians can print as much as they please. And the incentives are aligned for them to use stimulus to get elected regardless of party.

A piece of news that has gone quietly under the radar for mass media is the fact the US executed its “nuclear option” for both sanctions regime and money printing.

For the 2022 sanctions on Russia, the US went beyond typical sanctions regime by seizing Russian assets. A big reason why the US is “safe” from an investor perspective is its protections for property rights - and the government crossed the line here.

Foreign leaders (both US adversaries and allies) are not stupid. The clear signal is that self custody is imperative in moments of crisis. And that they need a coherent strategy to protect against trade settlement complacency.

If we combine this with the fact that the US has printed massive amounts of USD in the same time period (effectively diluting treasury holdings in foreign reserve balances), it’s obvious why countries are looking for new options.

Putin has emphasized the importance of gold as a stabilizing asset for the Russian economy, especially in light of Western sanctions. In early 2022, Russia pegged its currency, the ruble, to gold, and 5,000 rubles will now buy an ounce of pure gold.

China appears to have studied the sanctions the West imposed on Russia over Ukraine and has proactively implemented long-term protective measures to fortify China's economy against similar pressures.

However, physical gold is only practical for reserve balances and nation state trading - which is why crypto is coming into play.

How BRICS is scaling this with crypto:

From reading headlines, I believe BRICS will scale its strategy with crypto in 2 primary ways:

1. BRICS Pay - a settlement system

2. Crypto reserves

BRICS Pay

BRICS Pay aims to simplify transactions among member countries by providing a streamlined digital payment system. This system facilitates cross-border payments, reducing the need for traditional banks and currency exchanges.

In other words - no need to settle transactions through the US Fed. But rather a swap with market driven rates similar to how crypto works today.

The process involves converting local currencies into digital tokens, which are then transferred across the network. Upon arrival, these tokens are converted back into the recipient's local currency. One of the biggest technological deliveries from blockchain is the reduction of centralized control over these sorts of mechanisms & logging these on a distributed ledger.

Granted, there are criticisms and uncertainties on exact design mechanisms (e.g., can Russia make your digital Ruble disappear?) - but assuming those are solved, cross border trade at the very least becomes much more decentralized.

Bitcoin Reserves

We already see countries like China increasing its gold reserves for the reasons above. But from a practical perspective, gold is difficult to move.

My personal prediction is as volatility for BTC decreases with maturity of the asset class, the attractiveness for it to be a store of value increases - less storage costs, easier for trade settlement, etc.

What we won’t see is news of these countries or central banks buying crypto, which enables front-running of purchase plans. Particularly in a relatively thinner traded asset class vs commodities & FX.

Opportunities for VCs & Founders:

There are a couple opportunities and themes I think could arise from these trends:

1. Importance of self custody security. If massive capital will be stored at a national level, the security needs to be bulletproof especially with the sophistication of cyberwarfare

2. Cross-border Payments. Architecture facilitating last mile settlement of FX on crypto rails in BRICS could be attractive if BRICS Pay takes off.

3. DeFi Opportunities. Crypto native DeFi has been one of the best PMFs in crypto. If the BRICS block pushes their own blockchain rails, real-world use cases in DeFi could be released to the masses. Lending, payments, cards, etc…

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