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

Author

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  • Andrew Clark

    (Department of Economics, University of Reading)

  • Alexander Mihailov

    (Department of Economics, University of Reading)

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.

Suggested Citation

  • Andrew Clark & Alexander Mihailov, 2019. "Why private cryptocurrencies cannot serve as international reserves but central bank digital currencies can," Economics Discussion Papers em-dp2019-09, Department of Economics, University of Reading.
    • Handle: RePEc:rdg:emxxdp:em-dp2019-09
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    References listed on IDEAS

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    6. Sean Foley & Jonathan R Karlsen & Tālis J Putniņš, 2019. "Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies?," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1798-1853.
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    Cited by:

    1. Ansgar Belke & Edoardo Beretta, 2020. "From cash to central bank digital currencies and cryptocurrencies: a balancing act between modernity and monetary stability," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(4), pages 911-938, June.
    2. Andrew Clark & Alexander Mihailov & Michael Zargham, 2021. "Complex Systems Modeling of Community Inclusion Currencies," Economics Discussion Papers em-dp2021-06, Department of Economics, University of Reading.

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    More about this item

    Keywords

    Bitcoin; cryptocurrency; blockchain; FinTech; central bank digital currency; international reserve assets;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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