Report: Central Bank Of Barbados Should Consider Including Bitcoin In Its Reserve Mix

Two economists, Winston Moore and Jeremy Stephen, have discussed whether cryptocurrencies should be included in the portfolio of international reserves held by the Central Bank of Barbados in a recent paper, CoinDesk reported.

The report says that digital currency is still very much in the early stages of adoption and there are many issues that have to be surpassed, particularly if a central bank will legitimately consider including Bitcoin in its reserve mix. The most prominent one of these issues is regarding the status of bitcoin – whether it is a currency or a tradable asset.

The authors opine that for the Central Bank of Barbados to competitively enter the cryptocurrency space, not only expensive expertise and considerable investment is required, but also it would have to “endure the already rapidly diminishing returns to scale and investment being experienced by new mining entrants into the market”.

“It would therefore be more prudent if the Central Bank of Barbados be an active trader of the asset/currency while focusing on utilising tools to transmit cryptocurrencies over the blockchain”, the report added.

Further it says that as Barbados maintains a peg against the US dollar, it is necessary that the Central Bank of Barbados holds enough of various currencies as a precaution against speculative attacks. The analysis of whether bitcoin should be included in the reserve mix is done using two empirical tools: a counterfactual exercise (using historical performance of the various exchange rates (including Bitcoin)) and a Monte Carlo forecasts of international reserves for the next 1, 2, 5 and 10 years (using a relatively small portfolio composition of Bitcoin (0.01 percent)).

The former tool suggests that had the central bank held a relatively small proportion of its portfolio in Bitcoin between 2009 and 2015, the impact on reserve balance volatility (due to exchange rate variation) would not have been much different from that experienced due to other major currencies. Moreover, the rise in the value of Bitcoin price would have also generated a significant return for the Bank. The Monte Carlo forecasting exercise yielded similar results.

However, the paper pointed out that as the proportion of reserves held in Bitcoin rises, the volatility of reserves would also increase.

“Given that the proportion of transactions done by Barbadians in digital currency is not likely to exceed 10 percent of all transactions in the short run, it is therefore recommend that if Bitcoin is incorporated into the portfolio of foreign balances of the Central Bank of Barbados, that its share should be relatively small”, the report concluded.