In October 2016, the Chinese yuan status went from “people’s money” to elite international reserve currency overnight… Most people have probably never heard of Special Drawing Rights (SDRs). In 1969, the International Monetary Fund (IMF) created them to supplement gold and the U.S. dollar as international reserves.
The SDR consists of a basket of national currencies. And the currencies in the basket are the elite of the elite: the U.S. dollar, euro, Japanese yen, and British pound.
On October 1, 2016, the IMF added the Chinese yuan to this elite group. (The Chinese Communist Party also calls the yuan the “renminbi,” or “people’s money.”) The Chinese took a major step by becoming an “international reserve currency.” Experts predict adding the yuan to the SDR basket could attract trillions to the currency.
Hayden Briscoe is the managing director at asset manager AllianceBernstein. He told CNBC that the addition of the yuan “should help underpin China’s continuing efforts to internationalize the currency and its capital account… [which] could lead to inflows of up to $3 trillion over the next few years.” Meanwhile, Morgan Stanley expects inflows to top $2 trillion over 10 years. Most of that money will come from foreign exchange traders.
Here’s why I’m telling you about the SDR and the yuan.
Last month, the head of the IMF raised the prospect of adding cryptocurrencies (like bitcoin) to the SDR.
Yesterday, I told you that Fidelity Investment was adding a digital currency exchange to its website. That would make the exchange available to its more than 26 million individual investors.
That’s just the tip of the iceberg compared to the IMF. Let me explain…
Joining Elite Company
Christine Lagarde is the chief of the IMF. And if she has her way, bitcoin could become a part of this elite basket of currencies.
Last month, Lagarde told a conference hosted by the Bank of England that it’s “not a far-fetched hypothetical” to see bitcoin added to the SDR.
And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable (emphasis original). …
I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR
This is very bullish news for bitcoin and cryptocurrencies in general…
The IMF has 189 members countries (see map below).
The countries shaded dark green are IMF members (the countries shaded in light green are members who don’t accept certain IMF agreements).
As you can see, that’s almost the entire world.
The IMF has nearly $300 billion in SDRs. That’s money that every member state can borrow from. If bitcoin were added to the SDR, that’s potentially billions of dollars of new demand that could pour into cryptocurrencies.
So not only will we see institutional investors buying bitcoin… but national governments borrowing from assets denominated in bitcoin too.
Piece of the Global Monetary Pie
The U.S. dollar makes up the biggest allocation of the basket at 41.73%. The euro makes up 30.93%, the yuan 10.92%, the yen 8.33%, and the pound 8.09%. Let’s be conservative and say the IMF allocates just 1% of the basket to bitcoin…
The yuan makes up a little under 11% of the SDR. And experts forecast $2-3 trillion will flow into that currency now that it’s in the basket.
By my back-of-the-napkin calculations, if the IMF adds bitcoin to its basket of elite currencies… we could see bitcoin attract $200-300 billion over the years.
That’s two to three times more than its current market cap.
Let the Game Come to You!