Two Barbadian economists have concluded that the country’s central bank may want to consider holding a small amount of bitcoin as part of its portfolio of foreign reserves.
In a new working paper, the authors examine the potential role cryptocurrencies could play as part of the portfolio of external assets held by a central bank, using Barbados as a case study.
The paper reads:
“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 goes on to note that the Barbadian dollar is pegged to the US dollar, and that as such, a reserve of foreign currencies keeps its money safe from speculative attacks.
While valuable in this regard, the authors state that the level of bitcoin reserves should be held in proportion to the digital currency’s use by citizens.
“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 adds.
A nascent industry
The paper pointed out that while innovative, cryptocurrencies are still very much in the early stages of adoption, meaning that it believes many issues still need to be overcome before a central bank could consider including bitcoin in its reserve portfolio.
Additionally, the paper says that a central bank must first determine whether it perceives bitcoin to be a currency or a tradable asset.
“Most early adopting jurisdictions see cryptocurrencies as assets and as such there are capital tax implications from the sale and purchase of such,” adds the paper.
The paper further argues that, unless recognised commercial banks, financial and central banking entities actively participate in the market, regulators will continue to exert caution within the space.
However, it does suggest it is seeing signs that such momentum is occurring, noting:
“Citibank’s intention to create its own cryptocurrency for primarily transactional services does present a model for financial entities, if not central banks, to follow.”
The paper also explores the possibility that the central bank may want to invest in bitcoin mining, but points out that in this instance, the costs to do so “outweigh the immediate benefits”.
For the Central Bank of Barbados to competitively enter this space, the paper states, it would need to procure expertise in the subject and make a considerable investment into what the paper deems are rapidly evolving miner computer technologies.
Bearing this in mind, the paper says that it would be more prudent if the central bank were to become an active trader of the asset while also focusing on learning the necessary tools to transfer cryptocurrencies over the blockchain.
The primary objective of this, the paper explains, would be to replace or supplement existing systems such as SWIFT and real-time gross settlement systems.
Barbados image via Shutterstock