Should central banks hold bitcoin as part of their currency reserves? Is it a safe way for a nation-state to store large amounts of value? According to Papa-Wassa Chiefy Nduom, vice president of Group Nduom (one of the largest multinational corporations in Ghana), the government of Ghana should encourage its central bank to hold at least one percent of its reserves in bitcoin. Other countries like Bulgaria may discover the value of holding bitcoin, after seizing billions of dollars worth of the cryptocurrency from criminals.
Central Bank of Bitcoin?
Central banks are typically either government or private institutions that are in charge of issuing money. In the United States, the Federal Reserve — a private institution — does this. The purpose of a central bank is in part to maintain reserves of currency for emergencies, for repaying debt, or for other official purposes.
Traditionally, central banks have been known to hold stockpiles of their own currency, foreign currencies (especially the U.S. dollar), gold, precious metals, or even oil in some cases.
Central banks hold currencies and assets outside of their own national currency typically as a hedge against a sudden drop in value, or hyperinflation.
It’s normal for central banks to also hold non-cash assets. But what would it mean if countries started holding bitcoin as part of their national reserves? Bitcoin is something that is wholly unique from almost any other asset class today.
It is (relatively) easy to store and secure, and can be readily exchanged for other currencies quickly and easily. It is also a reliable store of value due to its deflationary nature. Therefore, one could argue that assets like bitcoin are an ideal option for central bank reserves.
This would also greatly increase the much sought-after “legitimacy” of bitcoin, as it is essentially being recognized by governments as an asset.
The Case for Ghana
In recent years, Ghana has seen deficits and mass depreciation of the local currency, the “cedi” — or GHS. The cedi has seen a decrease in value from a height of around $0.52 each to now only $0.22 each in just five years. Looking back to 2008, the cedi was almost at parity with the U.S. dollar. Sometimes it was even slightly above it by a few cents.
Speaking to the Ghanian central bank, Nduom cautioned that, “as a central bank, you’ve got to pay attention [to bitcoin].”
Nduom went over some of the financial benefits that Ghana could see if they were to get involved in bitcoin. Specifically, using the cryptocurrency could allow for greater foreign exchange, investments, and “massive inflows of foreign currencies to Ghana.”
He also noted that other central banks in Africa “may buy euros, Swiss franc, or Australian dollar or New Zealand dollars but they can also invest in [bitcoin] because big investors in the world believe that [bitcoin] will be a new digital reserve currency and reserve currencies are for central banks, and the central banks also have the technical capability to make a decision on this.”
Too Speculative and Volatile?
What about the price volatility that cryptocurrencies experience? Would this pose a risk to a large bank? After all, the U.S. Department of Justice was recently mocked for selling Silk Road bitcoins for $334 each, when it should have netted $4,260 — or much more if it had waited a couple more months. But then, it could also have gone in the other direction.
Nduom addressed this, saying, “I don’t think it’s a gamble, I think every investment is a gamble, getting out of your bed in the morning is a gamble. If you are completely preoccupied with risk you won’t do anything… in terms of managing reserves there is potentially a new reserve asset and as a central bank, you need to study blockchain.”
To further clarify his position and add several details to his argument, Nduom posted the following on his Twitter account:
Still has momentum @ 73k likes. This is real. BTC fits into global finance as gold 2.0 (reserves) and better collateral than land. Overwhelmed by positive response and excited for a more fair world. pic.twitter.com/zjlpoPwDR8
— Papa-Wassa Chiefy Nduom (@chiefynduom) January 3, 2018
Is Bitcoin Right for Central Banks?
It would be wise to consider the ramifications of bitcoin becoming a new global reserve currency for governments and banks. Prices would likely see rapid jumps if central banks across the world, representing hundreds of trillions of dollars, were to suddenly pursue bitcoin ownership.
While it is unlikely that any central bank would allocate more than one or two percent of its reserves to bitcoin (initially, at least), even a one percent average rate across the globe would result in massive price jumps for bitcoin. If banks decided to hold another digital asset, it too would likely see large gains over time.
Finally, bitcoin naysayers would lose the ability to make the classic claim that bitcoin is “backed by nothing“. If national governments and central banks were intentionally holding it, then one could argue that bitcoin is in fact “backed” by these banks that have a vested interest in seeing its value stabilized.
Overall, it would likely be a good thing for bitcoin to become a government-held asset, at least in some parts of the world. That’s true particularly in places where the buying and storing of large amounts of foreign currency or physical assets like gold are difficult. Bitcoin in Africa could become an incredible case study and a shining example for the rest of the world’s financial systems.
Do you think central banks holding bitcoin is a good idea or not? Let’s hear your thoughts.
Images via Pixabay