What insights does the history of global reserve currencies provide for the future of Crypto Assets?

What currency will the world trust next?

Written by: Blockworks

Compiled by: Wuzhu, Golden Finance

"Trust is one of the most powerful economic forces on Earth." — Charlie Munger

What currency will the world trust next?

The Spanish real (also known as the eight real, Spanish peso) was the first global currency.

From the 16th to the 19th century, the silver coins minted by the Spanish government circulated across six continents and served as legal tender in five of them (parts of Europe, Africa, Asia, and America).

In many places, these silver coins are very popular, and you can even cut them in half, quarters, or eighths to use as change (thus referred to as "eight pesos," referring to a whole coin).

The Spanish peseta was not a true global reserve currency, but that was only because central banks around the world did not hold it in reserve at the time.

But it provides a reserve for value storage for private savers around the world - making today's dollar the institutional heir to the peseta during the era of fiat currency.

These two global currencies serve the same function: reducing international trade friction by providing a nearly universal medium of exchange, unit of account, and store of value.

Today, the global reserve currency pays homage to its predecessor in both name and symbol—the dollar sign "$" is thought to have evolved from the Spanish currency mark (hence, the dollar sign is still referred to as the "peso sign").

But the debt problem is more serious.

The first dollar was established as the basic currency unit of the United States in 1792. It was a silver coin with a metal content roughly equivalent to that of the Spanish silver coin: about 24 grams of pure silver (plus about 2 grams of copper to enhance its durability).

However, the amount of US dollars minted by the US government is far from sufficient to meet circulation demands, so Spanish silver coins continued to circulate widely alongside the dollar—these two dollars were regarded as interchangeable in everyday transactions for many years, and even until 1857, Spanish silver coins were still legal tender in the United States.

This is natural because the metal content of the two dollars is the same.

But the lesson of the Spanish dollar is that its significance lies not just in the metal itself.

On the contrary, the reason why the Spanish dollar became the first world currency is that people trusted its issuer.

In the 17th century, dozens of countries issued silver coins, but the Spanish dollar was particularly favored because it came from the highly standardized royal mint of the Spanish colonies, backed by a powerful empire that strictly controlled quality and valued the integrity of its currency.

For example, people do not weigh every Spanish dollar they receive, nor do they check its purity—if the dollar comes from a Spanish mint, they will trust that the amount and quality of silver it contains is consistent with what the Spanish government claims.

However, after the Latin American countries gained independence, Spain lost control over the silver mines and their surrounding mints, which had supplied the world with Spanish currency.

Newly independent countries in Latin America continued to mint almost identical silver dollars - but political instability led to inconsistent minting volumes, intentional devaluation, and even the production of counterfeits at poorly regulated provincial mints.

Part of the reason is that merchants and bankers around the world have begun to favor currencies issued by more reliable issuing countries like the UK and the US—not because they have more silver, but because they are more trusted.

There is a lesson in this.

The pound becomes the next global currency, backed by its redeemable gold characteristic and people's trust in British institutions—although the pound cannot be melted, people believe that the Bank of England will exchange it for approximately 7.3 grams of gold as needed.

But the value of global currencies goes far beyond the metal itself—trust in government credit, central bank stability, and the liquidity of financial markets quickly becomes equally important.

In the 19th century, the pound sterling—supported by gold, reasonable British governance, and London's advanced banking system—replaced the Spanish dollar, becoming the preferred medium for large-scale financing and reserves.

Of course, the next global currency completely abandons metal backing: the dollar is only supported by our trust in the Federal Reserve, the U.S. government, and the U.S. financial markets.

But this situation may not last long.

The United States still has the largest economy, the deepest financial markets, and the strongest property rights in the world—but erratic government policies and fierce rhetoric are causing people to question how much they should trust the dollar.

As a result, many people are rethinking what to trust next.

Ken Rogoff believes that the next trust object may be China's Renminbi.

He said in the "Currency Affairs" podcast: "Many countries do not trust the United States. They would rather deal with China. They understand Chinese business and know what China wants... They would rather let China have (their information) than Donald Trump."

He said that the consequence is that you may soon find yourself in a "certain African city" where you used to love the dollar, and "when you take out dollars, they will ask, 'What is that? Where is the RMB?'"

This will be a huge change.

Some people believe that the changes will be greater - the next generation of global currency will not be issued by governments at all: Bitcoin is a form of "trustless" currency, and many believe it will surpass the trust issues that led to the decline of the Spanish dollar and the pound, which now plague the dollar.

This will form a natural evolution process: Spain trusted to mint coins > the United States trusted to issue legal tender > Bitcoin will be trusted to create magical internet currency.

However, it still needs to be trusted, because as Vitalik commented in a blog post, "Blockchain applications will never be completely trustless."

The market value of Bitcoin at 2 trillion dollars proves that it has gained an astonishing amount of trust - but I am not sure if it will gain the trust of more people necessary to become a global reserve currency.

Because history shows that people trust the government to issue their currency.

But this also indicates that the dollar is not the first global currency—and it is likely not to be the last.