Gold’s Fungibility Faces Diplomatic Scrutiny While Bitcoin Stands As A Safe Haven

The fungibility of the legacy sound money has come under fire as Western nations seek to delegitimize gold mined in Russia.

At the 48th annual Group of Seven (G7) summit, held June 26 – June 28, 2022, in the Bavarian Alps of Germany at the stunning Schloss Elmau, President Joe Biden stated that the United States and three other G7 members will seek to ban importing newly refined or mined Russian gold. The ban follows a string of sanctions that have sought to economically damage Russia in retaliation against their 2022 invasion of Ukraine. Of note:

• The United States is accompanied by fellow members of the G7 (Canada, Japan, and the U.K.) in taking action against importing gold of Russian Federation origin.
• The U.S. Department of the Treasury has “determined that the prohibitions of section 1(a)(i) of E.O. 14068 shall apply to gold of Russian Federation origin, with immediate effect.”
• This prohibition does not apply to Russian gold that was located outside of Russia prior to the day of the ban’s implementation.
• The U.K. government released a formal statement banning the import of Russian gold to serve as “tough new measures” against Putin’s escalation of the Russo-Ukrainian War. The U.K. was the largest importer of Russian gold, accounting for about $16.6 billion (£13.5 billion) worth of gold now anticipated to be affected by the ban.
• The London Bullion Market Association, an international trade association representing the global over-the-counter (OTC) precious metal bullion market, has acknowledged the announcements from the participating G7 nations and will coordinate with the sanctions accordingly.
• Russian oligarchs are primary targets for a ban on gold as Western sanctions endeavor to amplify punishments against Russia’s wealthy elite. Sanctions have caused the loss of tens of billions of dollars in their collective net worth with foreign nations confiscating Russian assets ranging from superyachts to real estate.
• The ban comes at a time when Russia recently defaulted on its foreign debt obligations for the first time since the Bolshevik Revolution when the Bolshevik government rejected all sovereign debt and other financial obligations—costing foreign investors millions of pounds in lost Russian investments.

Excluding energy industries, precious metals such as gold are Russia’s largest export at $18.7 billion (£17.8 billion) in 2020. Banning the import of Russian gold aims to add economic obstacles for Russia’s participation in global markets and also works to push Russia towards an artificial default on their $40 billion (£38 billion) foreign debt. The isolated nation has the monetary means to make the impending payment, yet cannot do so given the stringent economic sanctions placed against them as well as countries freezing their foreign currency reserves held abroad.

In practice, international sanctions have wholly restricted the Russian government’s ability to make any payments and have effectively cornered Russia into international default. Centralized international systems like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) will arbitrate the final settlement of funds depending on diplomatic relations with that nation, whereas Bitcoin does not discriminate against end-users — no matter the intent of the end-user so long as they follow the hard rules of the Bitcoin network.

The blacklisting of newly refined or mined Russian gold exemplifies the necessity of an immutable and fungible alternative form of money resistant against authorities having jurisdiction—regardless of that authority’s intentions. The Bitcoin network, a permissionless and relatively instant final settlement layer without any intermediaries, serves to provide the most reliable and secure payment system capable of transacting with anyone across the Earth. It would then follow that Bitcoin’s permissionless nature makes it the ideal money for enemies, like Russia, but similarly the ideal money for oneself.

While the participating members of the G7 have conveyed the ban’s intention is to bring a resolution to the tragic and needless war in Ukraine, the decisions made by those members do not provide a podium for a majority of the world to participate in these tight-knit, globally influential discussions.

One Group To Rule Them All

The G7, an international coalition consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the European Union as a non-enumerated member, addresses macroeconomic and monetary issues to achieve their global socio-economic goals. Originating from an ad hoc gathering of finance ministers centered around the Nixon shock and the 1970s oil crisis, their scope of discussion has broadened to also include international security, environmental objectives and humanitarian crises.

Although lacking a legal or institutional basis, these upper crust leaders wield substantial sway in the outcome of international diplomacy and economic action. Chosen representatives from non-member states and international organizations are invited to the summits as guests, yet the significantly influential group remains highly exclusive to formally join. The current countries in the G7 account for roughly 75% of the collective global net wealth and make up 777 million people, or approximately 10% of the global population.

Every year the G7 deliberates on the increasing instabilities of the world and how to solve them. Although the stated goal for the summit is to “progress towards an equitable world,” the people that are likely to be most affected by global instabilities are excluded from participating in the discussion. In effect, the summit’s ambitious goals are largely dependent on the self-interests of affluent countries representing a fraction of the global population. In some respects, the G7 operates as an oligarchy themselves given the disproportionate representation of the demographic they’re supposedly serving.

If there were ever to be a globally coordinated attack against the Bitcoin network, then it would likely originate from a multinational organization with established diplomatic prowess. The global decentralization of hash rate (miners) and full nodes (users) maintain the impracticality of a nefarious entity, perhaps a coalition of nations, seeking to manipulate the open ledger or implement miner bribery to limit blockchain accessibility.

Although the U.S. has seen a recent influx of international mining operations seeking a stable political environment to cheaply mine bitcoin following the “official” China ban on bitcoin mining, the growing congregation of hash rate in a single nation presents a situation not much more comforting than when bitcoin miners in China contributed to more than half of all network hash rate before the China ban. The consolidation of a majority of hashrate under one jurisdictional umbrella further enables potentially detrimental U.S. government intervention.

1 BTC = 1 BTC

A refusal to import newly refined or mined gold purely because of its provenance is an attack on the monetary characteristics of gold. Gold as a mode of payment fails if fungibility, the equal exchange of one unit for another unit, is no longer recognized by a transacting party. Similarly, bitcoin must exhibit total fungibility between satoshis, currently the smallest unit of the bitcoin currency, else the Bitcoin network would fail as a permissionless monetary system if an exclusive, powerful group of leaders can deny bitcoin payments because their provenance is decreed illegal.

The ban, if hypothetically directed at Bitcoin mining, would deem all newly mined bitcoin by any Russian-affiliated mining operations as a criminal offense to transact with and therefore worthless outside of Russia. Such a ban would affect about 4.6% of the network hash rate (estimate prone to error due to redirected IP addresses via the use of VPN or proxy services) and accordingly 4.6% of all newly mined bitcoin on average. Because Bitcoin implements proof-of-work and not proof-of-stake, any attempt to blacklist the accumulation or distribution of newly mined bitcoin does not catalyze authority of the network’s ledger simply by virtue of possessing a majority of the circulation supply.

Although Bitcoin exhibits the necessary monetary properties of scarcity, portability, fungibility, divisibility, durability and acceptability, there are companies that specialize in exposing the privacy missteps of Bitcoin users which only serves to degrade fungibility for those users. Blockchain analyzing firms leverage the open ledger’s transparency to potentially yield identifying information from one’s UTXO history; and then applying heuristics to determine ownership of addresses. In other words, one’s total bitcoin net worth can be gleaned from the blockchain if privacy practices are not prioritized.

The pseudo-anonymous transparency of the Bitcoin network is intentional; however, this can also work to undermine user privacy. Fungibility, and consequently user privacy, can improve, but requires more than just a few concerned tech-savvy people in the corner of a room to make meaningful improvement. Existing methods of increasing fungibility and security are not intuitive for the average individual; such methods often require proactive UTXO management and technical know-how when sending bitcoin payments to a merchant, friend or to one’s own cold storage wallet.

Bitcoiners must work to implement and advance privacy solutions to ultimately solidify the fungibility of the bitcoin currency. If a vast majority of network participants voluntarily buy and send bitcoin from a custodial exchange requiring checks on Anti-Money Laundering and Know-Your-Customer (AML/KYC), then the on-ramps to owning or sending even a single satoshi will be increasingly subject to centralized intermediary discretion.

A quick, simple way to transact more privately is using the Lightning Network, a second layer instant payment system, which, while imperfect, does help to obfuscate one’s transaction history. There are many resources available to begin learning the nuances of privacy when transacting in bitcoin. One can even purchase non-KYC bitcoin through the Lightning Network using RoboSats!

Closing Thoughts

The effectiveness of this ban will not be immediately known; indeed, a global effort to enforce the restriction of Russian gold imports and inflict Russian default would not serve to help global debt markets — making investors more cautious and less willing to advance capital which could result in a domino effect of defaults in other emerging markets.

Heightened inflation at a multinational scale and global commodity shortages exacerbated by supply chain disruptions are the result of restricting access to international trade networks, either because of the pandemic or the war in Ukraine. Gold is historically an inflation hedge and many people, including Russian oligarchs, seek financial security in buying gold. The totality of the ban’s ramifications may be subtle, but the precedent is set and Bitcoin is fair game for the G7 nations.

As mentioned, Bitcoiners must take proactive measurements in individual privacy to supplement bitcoin fungibility. Bitcoin can still be valuable in purchasing power but fail as a permissionless, peer-to-peer transactional layer if fungibility is compromised.

The author hopes to never have to see an article entitled, “Bitcoin’s Fungibility Faces Diplomatic Scrutiny.”

This is a guest post by Okada. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.