Central Banks Can No Longer Dismiss Cryptocurrency

Central banks have been very dismissive of cryptocurrencies. For one, cryptocurrencies are the very antithesis of what a central banks does, which is to regulate money. In addition, central banks are concerned with the little security that digital funds provide. In January 2018 we reported that Japan’s Coincheck experienced a $500 million theft, and the decentralized nature of Bitcoin is making it difficult for authorities to conduct a thorough investigation.

In the U.S., the Federal Reserve isn’t convinced that central banks need to completely regulate cryptocurrencies. Fed Chief Jerome Powell said that technical issues and risk management surrounding cryptocurrencies both present a challenge that are best left to the private sector. However, despite the constant dodging and dismissive nature of most central banks toward cryptocurrencies, analysts believe that they cannot ignore them any longer.

Last December veteran economist and CEO of Blockchain Peter Smith said that central banks will begin holding digital funds as part of their balance sheet in 2018.

“Bitcoin is already a top 30 currency by supply, and this trend, and pressure to hold digital currency as part of reserves will only accelerate as the price rises,” Smith said.

Smith adds that central banks will most likely buy Bitcoin and Ethereum – the two most popular cryptocurrencies in the world – as part of their reserves.

Bitcoin analysts like Smith believe that the G7 central banks — a group of central banks from the US, Canada, France, Germany, UK, Italy, and Japan — will  kick off the purchasing. The main reason for this is due to Bitcoin’s trend of recovery after a sharp decline, which could mean that regulated cash may soon be devalued against cryptocurrencies. When this happens, the G7 countries will be forced to modify their foreign reserves, and include cryptocurrencies in their portfolio.

With G7 central banks expected to back cryptocurrencies, other central banks from around the world may follow suit.

“In 2018, G-7 central banks will witness Bitcoin and other cryptocurrencies becoming the biggest international currency by market capitalization,” said Eugene Etsebeth, a former central bank official from the South African Reserve Bank. “This event, together with the global nature of cryptocurrencies with 24/7 trading access, will make it intuitive to own cryptocurrencies as they become a de-facto investment as part of a central bank’s investment tranche.”

Apart from the prediction of regulated cash devaluing against cryptocurrencies, Bitcoin’s rising popularity in investor markets is one of the reasons why central banks can no longer dismiss cryptocurrencies as a passing fad. Last year, CME, the world’s largest futures exchange, launched its very own Bitcoin futures contract. Bitcoin futures are like any other futures contract where investors agree to buy a given quantity of securities on a certain day. In addition, traders also have the option to trade Bitcoin spreads. Nadex states that Bitcoin spreads allow traders to take short-term positions on the price of Bitcoin with risk-reward protections. The financial markets have embraced various Bitcoin-related investment vehicles, and the recovering value of the cryptocurrency shows how the public continues to support the new asset class.

Awareness regarding the weakness of regulated cash against cryptocurrencies is becoming more apparent, and central banks need to make a decision modifying their existing investment policies for reserve management.

Foreign reserve assets are used to aid international trade. That being said, holding the currency of a trading partner makes transactions easier. In 2018, cryptocurrencies will not only give G7 countries the option to diversify their foreign reserves but also make inter-country trading more efficient by using a singular payment method.