Central Bankers advise Barbados to hold Bitcoin in Foreign Reserves

Barbadian economists do the research

Two economists who worked at the Central Bank of Barbados release a paper titled: Should Cryptocurrencies Be Included In The Portfolio Of International Reserves Held By The Central Bank Of Barbados? In this paper they advised the the Central Bank of Barbados to consider keeping digital currencies in its foreign reserves. Though they advised, just a small amount would suffice, it is noteworthy that they even advised the bank to take this step.

Abstract from the paper

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 recognized reserve asset and are held to permit the country to engage in international transactions.

Within recent years, cryptocurrencies have been increasingly utilized for international transactions, and it is possible there use might expand in the future. This paper therefore examines the potential role of cryptocurrencies 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.

Former Central Bank Economists

Dr. Winston Moore is presently a Senior Lecturer in Economics at The University of the West Indies, prior to this, he held the position of Senior Economist at the Central Bank of Barbados. Jeremy Stephen is a trained business and financial consultant who assists business entities with their business and financial planning strategies, also a former economist at the Central Bank of Barbados – where he was responsible for maintaining the Bank’s economic and financial forecasting models.

Barbados and Bitcoin?

The Barbadian news outlet Nation News caught up the two gentlemen and this is what they had to say

“Given that the proportion of transactions done by Barbadians in digital currency is not likely to exceed ten per cent of all transactions in the short run, it is therefore [recommended] that if Bitcoin is incorporated into the portfolio of foreign balances of the Central Bank of Barbados, that its share should be relatively small.”

As a result, it is possible that digital currency could become a key currency for settling transactions. In addition, given that 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,” they said.

The counterfactual exercise suggests that had the Central Bank of Barbados 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 significantly different from that experienced due to other major currencies.

In addition, the appreciation in the value of the Bitcoin portfolio (in US dollars) would have also generated a significant return for the Bank However, …as the proportion of reserves held in Bitcoin rises, the volatility of reserves would also increase.” The economists also pointed out that the innovation that is the cryptocurrency is still very much in the early stages of adoption [and] as a result, there are many issues that have to be surpassed, particularly if a central bank will legitimately look at including Bitcoin, for instance, in its reserve mix.”

The Central Bank operates as the banknote issuing authority for Barbadian currency

The Central Bank of Barbados is the national monetary authority responsible for managing banking and other financial and monetary matters on the island of Barbados. The Central Bank was established by Act of parliament on 2 May 1972.

The regulatory capacity of the central bank handles the issuance of Barbadian banknotes and coins, and licensing of agencies such as: banks, investment businesses, depository trust and finance companies. It also undertakes supervision of Barbadian financial institutions, credit worthiness of the financial system, administering of the international reserves, and reporting regularly to the country on the national finances.

Prior to the establishment of CBB, Barbados’ monetary policies were governed through its membership in the Eastern Caribbean Currency Authority. Barbados’s commercial banks are ranked 21st out of 134 global jurisdictions assessed by the Global Competitiveness report.