Amid the turmoil of the last few weeks, it’s easy to lose sight of what our industry is about: independence and innovation. These two fundamental drivers of prosperity and progress are not unique to crypto – but only in crypto are they entwined and embodied in liquid assets.
One feature of the innovation is the vast range of assets that exist and continue to emerge. Not all will survive, but those that do will have the potential to impact the entire spectrum of economic influence – from individual savers to professional investors, from merchants to financial institutions, from local communities to central banks.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
Central banks? Yes. While we do not yet have clear examples of central banks embracing crypto, it’s not far off. And the U.S. dollar only has itself to blame.
It’s tragically ironic that after a period of the sharpest increase of U.S. money supply in history, nations around the world are suffering an acute shortage of dollars. A couple of days ago, Ghana moved to start paying for oil imports in gold due to a lack of greenbacks. Earlier this month, credit ratings agency Fitch downgraded Nigeria due largely to the central bank’s policy of rationing the supply of U.S. dollars, which has led to fuel scarcity, suspended flights and accelerating inflation.
Last month, reports emerged from Egypt of a chronic wheat shortage due to a lack of dollars with which to pay for large shipments of the grain sitting on ships in Egyptian ports. This summer, Sri Lanka found itself unable to pay for fuel, had to close schools and offices and prioritized allocations to counterparties who could pay in dollars. Earlier this year, dollar rationing by Kenyan banks led to food shortages and soaring prices. The list goes on – dollar shortage stress around the globe is triggering hunger, accelerating price spirals and, in some cases, toppling governments.
A large part of this is political. The U.S. Federal Reserve has a system of swap lines that dispense dollars to foreign central banks in case of need. But not to all central banks – only Canada, England, Japan, the European Union and Switzerland have access to standing swap lines. In theory, others can get temporary ones in times of crisis, but even during the height of the pandemic, the Fed only provided swap lines to two emerging economies: Brazil and Mexico.
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The worsening credit profiles of would-be dollar borrowers are a factor in this lack of generosity, as is the concern that U.S. loans might go to repay Chinese debt or finance imports from Russia. And while the U.S. can come to the rescue when total implosion is imminent, as it did for Sri Lanka earlier this year, that intervention can carry conditions that many nations are unable to meet – greater distance from China, for instance.
Even holding liquid dollar assets as reserves is not what it used to be. The seizure of Russian reserves at the start of the war in Ukraine has shown central banks that the world’s “safe asset” is not as safe as everyone thought (as for price volatility, well …)
Now, what if there were a seizure-resistant monetary asset that was not subject to the economic priorities of third parties and that could be sold for dollars 24/7/365? Oh wait, there is.
Attention to the idea of central banks holding bitcoin is growing. In May, the Alliance for Financial Inclusion organized a conference in El Salvador that convened central bankers and financial regulators from 44 countries to discuss small business financing, financial inclusion and bitcoin. Most were from small countries, but not all: representatives from Nigeria, Bangladesh, Pakistan and Egypt – each in the top 50 countries ranked by GDP – were present; beyond Africa and Asia, coverage included nations from the Middle East, Latin America and at least one former Soviet republic.
Even academia is getting involved. Last week, Matthew Ferranti of Harvard University’s economics department published a paper on, you guessed it, central banks and bitcoin. Technically the paper is about the risk of sanctions on central bank reserves and is one of the first to focus on the impact of sanctions before they happen, via hedging and the resulting effect on the reserves composition. Ferranti concludes that the shifting global landscape makes a case for the inclusion of cryptocurrency in that mix, and produces a whole lot of formulas and numbers to back that up. The renminbi gets a shout-out, too.
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Central banks do seem to be re-evaluating their allocations. A recent report by the World Gold Council revealed that third-quarter gold purchases had jumped 18% year on year, with central banks accounting for a quarterly record of 400 tonnes (the previous record was 241 tonnes in Q3 2018). Central bank purchases for the year to date reached 673 tonnes at the end of September, higher than any other full year total since 1967.
But it is no secret that even gold reserves are vulnerable. The New York Federal Reserve building holds the world’s largest known monetary gold reserve, much of which belongs to foreign central banks. Access to gold reserves, whether physical or paper, is not 100% guaranteed. Bitcoin, on the other hand, is a bearer asset that is not expensive or complicated to store securely on national territory, a few clicks away from a market.
It’s even possible the embrace of bitcoin by emerging economy central banks could be with U.S. support. The alternative is U.S. lending to high-risk countries, which carries a domestic political cost; the expansion of non-dollar swap agreements, such as with China; or the collapse of some emerging and frontier economies. Apart from the human tragedy, many are key commodity exporters.
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I used to think the adoption of bitcoin by central banks for their reserves would happen soon, given the urgent need in some pockets of the global economy – now I realize that getting regulators comfortable with the idea, especially after the high level of misunderstanding of what the FTX collapse is actually about (i.e., fraud, not crypto), could take some time. But it is becoming increasingly clear to me that it will happen, because it needs to happen. The doubt and distrust sown by recent crypto drama will recede, and the desperate need to shore up economic resilience – combined with a growing understanding of the relative simplicity of an asset that can be converted into dollars or any other currency at any time – will incentivize greater acceptance and experimentation.
We are also likely to see a domino effect: Where one goes, so will others. And with this, the world will witness an asset that started retail-first, from the ground up, ending up as a support for not just central banks but also the resilience of entire nations.
