The Petrodollar is History. CBDCs are here.

This is the financial earthquake everyone was preparing to absorb after Saudi Arabia's announcement that it will not renew the 50-year-old Petro-dollar accord with the United States. The agreement just expired on Sunday, June 9th.

The agreement, signed by the U.S. and Saudi Arabia in 1974, provided for two joint commissions: One on economic cooperation and the other on Saudi military needs. It was said to have brought about an era of increasingly close collaboration between the two countries. At that moment, American officials expressed optimism for a deal that would be an encouraging step toward increasing Saudi oil production.

They also viewed this as an exemplary case for the improvement of economic cooperation between Washington and other Arab states. The political decision of refusing to renew the pact enables Saudi Arabia to trade their oil and other goods in multiple currencies, such as the Chinese RMB, Euros, Yen, and Yuan, along with the U.S. dollar. This further opens up the window for virtual currency like Bitcoin. This newest development marks the break from the petrodollar system devised in 1972 when the United States had detached its currency from gold. This is expected to be a major step in the global de-dollarization process.

The Consequences

Oil being traded in USD dramatically raised the Dollar's value. The increased tug of demand by countries needing to buy or sell oil in USD only has given the USD an extreme advantage in strength over other currencies. Without this massive global energy market helping prop up the value, we may see a dramatic decline in its value. Australia may find itself caught in the mess, especially in the short-term, as the status-quo has been to try and keep the Aussie Dollar weaker than the U.S. Dollar so that exports run smoothly.

Freedom at Last, or CBDCs?

Saudi Arabia has now officially joined Project mBridge, which is a cross-border experiment for Central Bank Digital Currencies. The project is being led by the Chinese central bank and it has already attracted a handful of participants, including the Saudi Central Bank. This is part of a broader plan to modernise payment systems, and it could reduce over reliance on cash, as well as it could mean less of the world's oil is traded in U.S. dollars by other countries as well.

Project mBridge was launched in 2021 by the central banks of China, Thailand, Hong Kong, and the United Arab Emirates in a stated effort to modernise payment systems and provide alternatives to cash. The BIS further noted that Project mBridge had advanced to the "minimum viable product" stage, and opened it to private financial firms who wish to help develop the technology further.

An estimated 135 countries and currency unions, representing about 98% of global GDP, are currently exploring technology-dependent CBDCs that allow cross-border movements but in a way that is difficult and politically sensitive. The Saudi Central Bank noted it has been assessing the feasibility of using wholesale CBDC to enhance cross-border payment and settlement between commercial banks.

International big financial institutions have rallied behind the mBridge. The BIS has also said that the platform is now also working with software called the Ethereum Virtual Machine, which supports the network Ether cryptocurrency uses (the same blockchain our Gold & Silver Standard tokens use). In addition to its six total participants, mBridge also has 27 other institutions, among others include the International Monetary Fund, the World Bank, and the central banks of Norway, Turkey, and South Korea, which have all signed in as observers to the project. Goldman Sachs, HSBC, and China's six largest state-owned banks are also working on the project.

So are countries breaking away from the shackles of outdated trade deals and becoming liberated? It is hard to argue that they are not. Are they being further ensnared into increased centralisation of banking power? This may also be the case. The world may be moving toward a scenario in which a singular global banking power, such as the BIS, has complete control over international trade with the power to switch off or sanction any country that does not follow their requirements.

Gold always has and always will sit outside such controls