Reserve currency is money that is usually held by central banks or government bonds for international transactions. Argentina, for example, will not be able to buy a Boeing 737 MAX passenger jet with its highly inflationary peso; It has to be paid in US dollars, which is why Argentina has dollars on hand – i.e. H. in “reserve”.
A second basic function is to support the value of a national currency. For example, if the Brazilian real collapses during an economic downturn, the Brazilian central bank could mobilize it again by buying reals with dollars it holds in reserve.
Could Bitcoin (BTC) fulfill these key functions of a reserve currency? “I think so, at least in the future,” Franklin Noll, currency historian and president of Noll Historical Consulting, told Cointelegraph. Because of the electronic nature of Bitcoin, it is well suited for processing payments. “If gold has been used for this in the past, that digital gold should do the job, if not better.”
These are now unusual times. When markets collapsed in March amid the COVID-19 crisis, Bitcoin followed suit. “BTC has not performed well,” Sinjin David Jung, executive director of the International Blockchain Monetary Reserve, told Cointelegraph. In early 2021, however, the world will face a different circumstance characterized by sizeable economic spending – especially in the US – and when the dollar falters, Jung said:
“BTC’s position is almost like the reserve currency of last resort in the hold when increasing the US dollar supply is the only tool to avoid financial depression and paradoxically, it causes the market to recharge.”
“The US dollar is still king”
The challenges remain, however, and Bitcoin is unlikely to oust the USD anytime soon. Noll said, “The current problem with Bitcoin, like gold, is that few, if any, goods or debts are denominated in Bitcoin.” In addition, he said, “It is hard to see a future where a significant part of world trade is in Bitcoin. The US dollar is still king. ”
Jonas Gross, project manager at the Frankfurt School Blockchain Center – a think tank of the Frankfurt School of Finance & Management – sees little chance that BTC will be used as a reserve currency by an industrialized country in the near future. “Skepticism is still very high,” he told Cointelegraph, referring to a statement recently made by Christine Lagarde, President of the European Central Bank, which called for global regulation of BTC, among other things due to concerns about money laundering has been.
“The dominance of the US dollar as the world’s reserve currency could indeed be threatened,” continued Gross. China is in advanced testing of its central bank digital currency – i. H. Its digital currency / electronic payments project – which could start as early as 2022, and may allow foreigners to access and use it for transactions. In this case Gross added:
“It would be easy and convenient to use a digital version of the yuan for global payments. Transaction costs could be reduced and the digital yuan would easily flow across borders.”
However, China’s yuan has to go a long way to catch the dollar. The USD made up 60.46% of the world’s allocated foreign exchange reserves as of the third quarter of 2020, followed by the euro (20.53%), the Japanese yen (5.92%) and the British pound sterling (4.50%), so the International Monetary Fund. The yuan was only fifth (2.13%).
Only six dominant reserve currencies since 1450
Campbell Harvey, professor of international business at Duke University, told Cointelegraph that the higher loan rates in the US, “the greater the risk [USD] is used as reserve currency. At some point it is too risky and alternatives are sought. “Indeed, economic history teaches that global reserve currencies don’t last forever.
In August, business intelligence firm MicroStrategy announced that it had introduced Bitcoin as a primary reserve asset for government bonds. In early 2021, former Canadian Prime Minister Stephen Harper raised the stake, suggesting that not only companies but governments could use crypto as a reserve, albeit as part of a “basket of things” that also included gold and fiat.
Since 1450 there have been six major world reserve periods with an average length of about 94 years. The US dollar has been the world’s reserve for 100 years and is outperforming the average. It almost corresponds to its predecessor, the British pound, which has dominated for around 105 years.
However, BTC alone is unlikely to become a reserve currency due to its extreme volatility, Harvey said. “Currently, USD volatility against 10 major currencies is around 3 to 4% per year. BTC ranges from 80% to 90%. “Gold has an annual volatility of around 15%.
Part of a basket?
On the flip side, cryptocurrencies could be used as part of a shopping cart in the future, Harvey added. “It is unlikely that there will be a single cryptocurrency in the shopping cart. At this point, all of the major central banks will have their version of a cryptocurrency. “
The idea of a diversified basket is not new, continued Harvey, referring to F. A. Hayeks in 1943 Business journal Paper entitled “A Commodity Reserve Currency”. Still: “There are many problems: what assets are you using and what are the weights?” Who actually determines the weighting and whether and when to add or delete an asset?
“Bitcoin could indeed be used as part of a” basket of things “to hedge against inflation and political turmoil,” Gross said. BTC is already seen as a reserve for corporate coffers, he added, and mentioned MicroStrategy. Noll also saw the recent adoption of Bitcoin as a treasury reserve by some companies as a significant development:
“It is a short step from a widely used private reserve currency / asset to a public reserve currency / asset. If Bitcoin is good enough for banks, insurance companies, and cities, it is certainly good enough for a small nation looking to fortify its own reserves. “
José Parra-Moyano, assistant professor at Copenhagen Business School, told Cointelegraph: “If Bitcoin or other cryptocurrencies create and continue to provide technical security, the central banks will add them to their reserves.” The maintenance of technical security over time is said to be but not easy, he suggested.
Is the infrastructure sufficient?
Is the BTC infrastructure nearly complete? Jung said to Cointelegraph, “Only BTC at this point [among cryptos] could be seen as a contender for reserve currency of last resort ”; Its transparency, simplicity and track record “clearly show that it was designed for this role”.
“There are actually some hurdles to overcome,” said Gross. “Lower volatility and higher speed – e.g. implemented via the Lightning network – would make BTC more attractive.” He also said efforts to educate regulators about cryptocurrencies should be enhanced so that they understand the technology’s potential “from a portfolio diversification perspective.”
Other potential obstacles include the “novelty” of Bitcoin – which has only been around for 12 years -, noted Harvey, as well as its still limited adoption, susceptibility to tampering – “see the academic evidence on USDT and BTC” – and also its vulnerability for algorithmic attacks “A 51% attack is expensive but doable.” Harvey added:
“Central banks don’t like it because it’s deflationary and the algorithmic nature of money creation claims their economic influence – of course this last point is also a selling point.”
Jung believes the oft-cited volatility error is exaggerated. BTC cannot help but be volatile in its positioning as a reserve currency of last resort. It will “continue to be volatile until the conditions are met where the US dollar value begins to decline steadily, even as the excess US dollar fuels larger market gains.”
When asked about the potential of BTC as a reserve currency, it is ultimately assumed that such a reserve will always be necessary. Harvey isn’t so sure. “Why do we need a reserve currency at all?” he asked. “In the future everything will be provided with a token. To pay for something, you have a choice of what to pay for – e.g. B. BTC, gold, IBM stocks, etc. Users have easy access to millions of cross-installments and can instantly pay with the asset they choose. ‘”
“When you talk about a reserve currency, everything is about long-term stability and competitiveness,” said Jung. “Therefore, in times of geopolitical uncertainty, the US dollar will always act as the world’s primary reserve. But what happens when the world and the US dollar continuously relax quantitatively? “
In this case, all bets will be void and national governments, starting with smaller countries, may actually be interested in a basket of hard and digital assets as a “last resort” reserve currency. Proponents of crypto and blockchain just have to spread the word and hope that at some point BTC or some other cryptocurrency will mature and be worthy of taking on the cloak of a generally accepted reserve.