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Why private cryptocurrencies cannot serve as international reserves but central bank digital currencies can

Andrew Clark () and Alexander Mihailov ()
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Andrew Clark: Department of Economics, University of Reading

No em-dp2019-09, Economics Discussion Papers from Department of Economics, Reading University

Abstract: This paper begins by a recap on the ambition and mechanism behind Bitcoin, followed by an overview of the top 10 cryptocurrencies by market capitalization. Our focus is on their price dynamics and volatility relative to those of fiat paper money and gold, assets that have traditionally served the functions of money and international reserves. We then perform a counterfactual analysis using the Bank of England's foreign currency reserves to determine the hypothetical performance in terms of relative volatility of two alternative reserve portfolios consisting of 0.1%, 1%, or 10% holdings of either Bitcoin only, since July 2010, or of a portfolio of 50% Bitcoin and 50% Ethereum, since July 2015. Revisiting in this light the functions of money and international reserves, we expound on why private cryptocurrencies do not meet the inherent requirements for both money and international reserve assets, whereas central bank digital currencies do meet these requirements. We, finally, "scale" the magnitude and dynamics of the recent Bitcoin bubble into a historical perspective, and conclude by a discussion of areas where blockchain-based and FinTech technologies could be beneficial in international trade, payments, banking and finance.

Keywords: Bitcoin; cryptocurrency; blockchain; FinTech; central bank digital currency; international reserve assets (search for similar items in EconPapers)
JEL-codes: G23 E50 E59 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2019-05-20
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
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