Should cryptocurrencies be included in the portfolio of international reserves held by central banks?

Abstract

In most countries, the central bank is required to hold reserve assets as a means of providing credibility for the value of the fiat currency. These assets can be in the form of gold, foreign exchange or some other internationally recognised reserve asset and are held to permit the country to engage in international transactions. Within recent years, cryptocurrencies have been increasingly utilised for international transactions, and it is possible that the use of these cryptocurrencies might expand in the future. This paper therefore examines the potential role of digital currency balances as part of the portfolio of external assets held by a central bank. Using the case of Barbados, the paper also provides a simulation of the effect holding some proportion of their asset-base would have had on the stability of the foreign reserves as well as the return on the portfolio of assets.

Keywords:

• international reserves
• cryptocurrencies
• fixed exchange rate

JEL classifications:

• F3
• E4
• E5

Public Interest Statement

Digital currencies, such as Bitcoin, are growing in popularity and are currently being used to facilitate purchases both online and in regular brick and motor establishments. Countries with fixed exchange rates normally hold a portfolio of balances denominated in various currencies to not only facilitate transactions but also defend the exchange rate peg. Despite this growing popularity of digital currencies, however, very few studies have considered the implications of including digital currency balances in the portfolio of foreign assets held by central banks. This paper therefore examines the potential implications of such balances, using the case of a small open economy that has maintained a fixed exchange rate peg for a relatively long period of time: Barbados. The results of the study would be of use to policy-makers in other small states as well as other developing countries where digital currencies are growing in popularity as a means of completing transactions.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Winston Moore

Winston Moore is presently a senior lecturer and head of the Department of Economics at The University of the West Indies, Cave Hill Campus. His recent research has examined the issues surrounding the green economy, private sector development as well as the economic impact of climate change on tourism. He holds a PhD in Economics from the University of Surrey; a MSc in Economics from the University of Warwick; and a BSc in economics from the University of West Indies, Cave Hill.

Jeremy Stephen

Jeremy Stephen is a trained business and financial consultant who assists business entities with their business and financial planning strategies. His core specialisation is in financial and economic modelling along with web development; financial training along with financial and business advisory services. He is also a lecturer at UWI Cave Hill in the Economics Department, specialising in financial economics and technology.