NO MORE THAN a “relatively small” amount of digital currencies such as Bitcoin should be used if the Central Bank decides to include them in Barbados’ foreign reserves.
That’s the advice coming from Barbadian economists Dr Winston Moore and Jeremy Stephen who have produced a paper entitled Should Cryptocurrencies Be Included In The Portfolio Of International Reserves Held By The Central Bank Of Barbados?
The two, who have both served as head of the Barbados Economic Society and currently lecture at the University of the West Indies, Cave Hill Campus, said once more participants like Citibank “continue to enter the market and support transactions via the blockchain”, “the counter part risks to smaller and highly vulnerable central banks, such as the Central Bank of Barbados, will be minimised”.
In the meantime, they advised: “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.”
Moore and Stephen said their paper “provides an assessment of the potential benefits and costs of holding Bitcoins as part of the portfolio of international reserves using the case of Barbados”. They noted that “within recent years, the proportion of digital transactions done using digital currencies has grown significantly”.
“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”.
This included determining if Bitcoin was a currency or a tradable asset.