A new working paper titled “Should Cryptocurrencies Be Included in the Portfolio of International Reserves Held by the Central Bank of Barbados” suggests the Barbadian Central Bank to hold a small portion of Bitcoin as a part of its foreign currency reserves.
The paper is authored by two economists – Winston Moore and Jeremy Stephen who previous worked at the Central Bank of Barbados and currently lecture at the University of West Indies.
The complete working paper can be read or downloaded here. [PDF]
The paper notes that Barbados maintains a peg against the US dollar, making it necessary for the Central Bank of Barbados to hold enough reserves of several foreign currencies as a precautionary measure.
The authors note their paper provides “an assessment of the potential benefits and costs of holding bitcoins as part of the portfolio of international reserves using the case of Barbados.”
The Working Paper’s Methods
The paper was created from the usage of two main empirical tools used to conduct the analysis. One is a counterfactual exercise that used the historical performances of various exchange rates – including Bitcoin. The other is based from Monte Carlo forecasts of international currency reserves over the next decade.
The first method deduced an assessment of differences in price volatility and returns from investment in Bitcoin using a small portfolio composition of Bitcoin (as low as 0.01 percent). Other investment ratios at 0.1 percent, 1 percent and up to 5 percent of the country’s reserves were also considered.
Bitcoin Could Become a Key Currency
One of the primary conclusions of the paper claims:
Within recent years, the proportion of digital transactions done using digital currencies has grown significantly. As a result, it is possible that digital currency could become a key currency for settling transactions.
The paper also makes light of “issues that have to be surpassed,” including that of a country’s central bank to “legitimately look at including Bitcoin in its reserve mix.”
The paper contends that, unless recognized commercial banks, financial and central banking entities participate in the market for cryptocurrencies, regulatory authorities will continue to embrace caution. Despite the hurdles, the paper made a note of private banking institutions making inroads into such endeavors.
Citing an earlier CCN article that made revealed Citibank looking to develop its own cryptocurrency, the author stated:
However, Citibank’s intention to create its own cryptocurrency for primarily transactional service does present a model for financial entities, if not central banks, to follow.
Fundamentally, the paper notes that investment in Bitcoin stands a good chance of increased returns in its assessments.
Barbados’ Central Bank as a Miner
The paper speculates the strategy of the Central Bank of Barbados to mine Bitcoin, while quickly noting the costs to outweigh the immediate benefits.
The Central Bank would need to “procure an already expensive expertise and considerable investment” to competitively enter the mining space, the authors note. Due to this, they conclude it would be far more prudent of the Central Bank “to be an active trader” of Bitcoin while focusing on the tools required to transfer cryptocurrencies over the blockchain.
Gaining this expertise would help supplement or even replace the current SWIFT or RTGS systems in use to transmit currencies, the paper notes.
The paper concludes by adding that any bitcoin reserves held should be in proportion to the use of the cryptocurrency by Barbadians.
With this in mind, the paper states:
“Given that the proportion of transactions done by Barbadians in digital currency is not likely to exceed 10% of all transactions in the short run, it is recommended that if bitcoin is incorporated into the portfolio of foreign balances of the central bank of Barbados, that its share should be relatively small,” it summed up.
Altogether, It is only prudent that central banks consider looking at Bitcoin as a currency reserve. A recent study suggests that Bitcoin is projected to be the sixth largest global reserve currency by 2030.
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