Bitcoin as a last resort? Crypto murmurs as reserves are rare

Currency is money held by central banks or treasures usually for international transactions. Argentina will not be able to buy a Boeing 737 MAX passenger jet, for example, with its highly inflationary peso; it will have to pay with US dollars, which is why Argentina keeps dollars on hand – ie, in a “reserve.”

A second fundamental function is to support the value of a national currency. If a Brazilian real, for example, plummets during an economic downturn, the Brazilian central bank could offer it again by buying reals with dollars it has in reserve.

Could Bitcoin (BTC) perform these key functions in reserve? “I certainly believe that, in the future at least,” Franklin Noll, financial historian and president of Noll Historical Consulting, told Cointelegraph. The electronic nature of Bitcoin makes it very suitable for settling payments. “If gold were used in the past to do so, this digital gold should do the job too, if not better.”

In the meantime, these are unusual times. When markets crashed in the midst of the COVID-19 crisis in March, Bitcoin followed suit. “BTC did not perform well,” Sinjin David Jung, managing director of Blockchain International Monetary Reserve, told Cointelegraph. But in early 2021, the world is facing a different circumstance, one marked by vast stimulus spending – especially in the United States – and if the dollar fails, according to Jung:

“BTC’s position is almost the ‘last resort contingent’ in holding value if a rising US dollar supply is the only tool for avoiding financial depression while paradoxically leading to market overpricing.”

“US dollar is still king”

But challenges remain, and Bitcoin will probably not replace USD anytime soon. Noll said: “The current problem with Bitcoin – as with gold – is that few, if any, commodities or debts are denominated in Bitcoin.” Moreover, according to him: “It is difficult to see a future where a significant amount of world trade is denominated in Bitcoin. The US dollar is still king. ”

Jonas Gross, project manager at the Frankfurt School’s Blockchain Center – a think tank affiliated with the Frankfurt School of Finance and Management – sees little chance of BTC being used as a reserve by any industrial country in the near future . “Skepticalism remains very high,” he told Cointelegraph, referring to a recent statement made by European Central Bank president Christine Lagarde calling for BTC regulation worldwide due to money laundering concerns, among others .

Having said that, “the dominance of the US dollar as the world’s reserve could indeed be threatened,” Gross continued. China is in the process of testing its central bank digital digital currency – ie, its digital currency / electronic payment project – which could be launched as early as 2022, and may be allowed to be accessed and used by foreigners for transactions. If that happens, Gross added:

“It would be possible to easily and conveniently use a digital version of the yuan for global payments – transaction costs could be reduced, and the digital yuan would ‘flow across borders’ quite easily.”

However, China’s yuan will have to go some distance to hold the dollar. USD accounted for 60.46% of the world’s allocated foreign exchange reserves in Q3 2020, followed by the euro (20.53%), Japanese yen (5.92%) and UK pound sterling (4.50%), according the International Monetary Fund. The yuan was only a fifth (2.13%).

Only six dominant reserves since 1450

Campbell Harvey, a professor of international business at Duke University, told Cointelegraph that as lending rates in the United States rise, “the more dangerous it is [USD] becomes a contingency. At some point, it is too risky, and alternatives are sought. “Indeed, economic history teaches that global reserves do not last forever.

In August, business intelligence company MicroStrategy announced that it had adopted Bitcoin as its main treasury reserve asset. In early 2021, former Canadian prime minister Stephen Harper raised the ante, suggesting that not only companies but governments could use crypto as a reserve, even though it was part of a “basket of things” that also included gold and gold. fiat.

There have been six major contingencies in the world since 1450, with an average span of about 94 years. The US dollar has already been a world reserve for 100 years, surpassing the average, and is nearly equal to its predecessor, the British pound, which dominated for about 105 years.

BTC by itself is unlikely to become a reserve due to its extreme volatility, though, Harvey said. “Currently, volatility of USD against 10 leading currencies is around 3% -4% a year. BTC is between 80% and 90%. ”He added that annual volatility has about 15%.

Part of a basket?

On the other hand, cryptocurrencies could be used as part of a future basket, Harvey added. “It is unlikely that it would be single cryptocurrency in the basket. By the time this happens, all central banks will have their version of cryptocurrency. ”

The idea of ​​a diversification basket is not new, Harvey continued, referring to FA Hayek in 1943 Economic Diary paper entitled “Commodity Reserves.” Still, “there are plenty of issues: What assets do you use and what are the weights?” Also, who actually determines the weightings and if and when an asset should be added or dropped ?

“Indeed, Bitcoin could be used as part of a ‘basket of things’ as a hedge against inflation and political turmoil,” said Gross. One is already seeing BTC being used as a corporate treasury fund, he added, citing MicroStrategy. Noll, too, considered some corporations’ recent embrace of Bitcoin as a treasury fund a significant development:

“It’s a short step from broad private currency / private reserve to public currency / asset. If Bitcoin is good enough for banks, insurance companies and cities, it is certainly good enough for a small nation that wants to strengthen its own reserves. ”

José Parra-Moyano, assistant professor at the Copenhagen Business School, told Cointelegraph: “It could be that if Bitcoin or other cryptocurrencies establish and continue to demonstrate technical security, central banks will incorporate them into their reserves.” But maintaining technical security over time will not be easy, he suggested.

Is the infrastructure adequate?

Is BTC infrastructure close to ready? Jung told Cointelegraph: “At this point, only BTC [among cryptos] it could be considered a contender for the last resort reserve ”; its transparency, simplicity and history “clearly demonstrate that it is engineered for this function.”

“There are indeed some obstacles to overcome,” according to Gross. “Lower volatility and higher speeds – eg, operated via the Lightning Network – would increase the attractiveness of BTC.” Furthermore, he outlined that efforts to educate regulators about cryptocurrencies should be improved so that they understand the technology’s potential “in terms of portfolio diversification.”

Other potential barriers are Bitcoin’s “novelty” – it has only existed for 12 years – Harvey noted that, as well as its still limited adoption, it is open to manipulation – “see academic evidence on USDT and BTC ”- and also vulnerable to algorithmic attacks. , “A 51% attack is costly but practical.” Harvey added:

“Central banks don’t like it because it’s deflationary, and the algorithmic nature of the money-making process overcomes their economic influence – of course, this last point is also a selling point.”

Jung believes that the quoted volatility impairment is often exaggerated. BTC cannot help but be volatile in positioning it as the last resort reserve. It will “remain volatile until conditions are met when the value of the US dollar begins to fall steadily even as too many US dollars are fueling higher market returns.”

Finally, when asking about BTC’s potential as a reserve, it is assumed that there will always be a need for such a reserve. Harvey, for one, is not so sure. “Why do we even need a ‘reserve’ currency?” He asked. “In the future, everything will be pruned. To pay for something, you have your choice of what to pay in – eg, BTC, gold, IBM stock, etc. Consumers will have easy access to millions of cross-rates and will be able to pay right away with whatever asset you choose. ‘”

“Inherently when you talk about reserves, it’s about stability and long-term competitiveness,” said Jung. “As such, the US dollar will always act as the world’s leading reserve in times of geopolitical uncertainty. But what happens when the world and the US dollar are in a constant state of quantitative easing? ”

If that happens, all bets are off, and national governments, starting with smaller countries, could gravitate to a basket of hard and digital assets as their “last resort.” Bidders of crypto and blockchain will have to keep spreading the word and hope that BTC or any other cryptocurrency becomes mature and worthy to take on the mantle of a commonly accepted reserve.