In 1971, President Nixon reached a deal with Saudi Arabia in which the latter would only accept US dollars for its oil. BTC might be the only currency accepted worldwide, but its high volatility might lead to using a Bitcoin-backed stablecoin like DOC.
Until 1971, gold-backed the US dollar while all other major currencies had a peg to it at a fixed exchange rate. However, that standard changed after World War I since only central banks could exchange the American fiat currency for the precious metal.
In the 1960s, the United States issued increasingly high amounts of banknotes to finance the Vietnam War, causing the economy to collapse. The country could not exchange the US dollars of foreign central banks for gold, as it had run out of its reserves.
That situation led President Ricard Nixon to cancel the Bretton Woods agreement established in 1944.
The Petrodollar Emerges after the End of the Gold Standard
Since 1971, nothing has backed most fiat currencies, whose exchange rates are free floating. President Nixon reached a deal with Saudi Arabia to maintain the dominance of the US dollar. The Middle Eastern nation ensured it would only accept US dollars for its oil in exchange for military protection.
The other members of the Organization of the Petroleum Exporting Countries (OPEC) followed the Saudi Arabian example. The US dollar thus became the de facto world reserve currency, as all nations needed US dollars to buy oil.
Amid the Ukraine crisis, Russia and China have intensified their ties, seeking to expand the BRICS alliance. Brazil, Russia, India, China, and South Africa were the founding members of that association.
Saudi Arabia is negotiating to join those developing countries, an increasingly powerful counterweight to the G7 alliance of Western nations and Japan. That would imply the end of the petrodollar system, as Saudi Arabia might accept other currencies, like the Chinese yuan, for its oil.
Other OPEC members might follow the Saudi Arabian example again, ending the dominance of the US dollar as a world reserve currency.
Bitcoin Might Emerge as a Neutral World Reserve Currency
A crucial fact for Bitcoin to replace the US dollar as the world reserve currency is neutrality. BRICS members might find it hard to agree on another national fiat currency as the dominant one.
The BRICS countries might not allow anyone to dominate their alliance as they have significantly different political systems and values. In other words, they will not accept the yuan, the ruble, or the rupee as the world reserve currency. Besides, the United States, Great Britain, Germany, and Japan will still have a powerful voice despite their decreasing dominance.
Since no nation controls Bitcoin, it might be the only currency accepted worldwide. However, its high volatility might lead to using a Bitcoin-backed stablecoin, like Dollar on Chain (DOC).
Unlike Tether or USDC, stablecoins supposedly backed by US dollars, the stability of DOC relies on a 100% Bitcoin-backed algorithm. Of course, the US dollar only serves as a reference since it is not in its system.
By Alexander Salazar
