TLDR: Owning Bitcoin as a reserve asset is no longer unthinkable for nation-states that want to become more sovereign. A recent proposal in Switzerland to put BTC on the central bank balance sheet again brought this to our attention. A Harvard research paper suggests that, from a risk-reward perspective, putting BTC in central bank’s treasuries can be beneficial, especially for countries that might face sanctions.
Before you click away because of the apparent absurdity of such a statement, think about the following: many countries already hold Bitcoin. Even though, for example, the United States doesn’t have a strategy to acquire Bitcoin, they sometimes hold Bitcoin for longer stretches of time. After seizure in law enforcement actions, for example, they will often postpone auctioning off the confiscated BTC for quite long.
This signifies something. After all, they won’t auction off batches of confiscated cocaine – they will unceremoniously destroy those. The fact that they don’t have the same policy with BTC tells you something: it’s viewed as a legitimate financial asset. But that doesn’t automatically make it a reserve asset.
Background of Reserve Assets
Central banks of Russia, Iran, Syria, North Korea, and Venezuela are under US sanctions. You might agree or not. But the fact remains that the ability of fiat reserve issuers to freeze transactions calls into question fiat reserve currencies’ status as ‘safe-haven’ assets and thus reserve assets. No central bank likes to see the US ‘push a button’ and nullify their US dollar holdings.
But how did we even get to a situation where central banks of many countries hold US dollars as a reserve asset?
Nations have traditionally (since the post-World War 2 era) held dollars or US Treasuries as a reserve asset. Why? In the early post-WW2 decades, these dollars could be exchanged for a fixed amount of gold. After the Nixon shock in 1971 – the de-pegging of the dollar from gold – the dollar became – unofficially – backed by oil. Oil was priced in dollars and the US guaranteed that the oil from Arab nations could keep flowing in abundance. So nations were comfortably holding dollars: it was an ‘energy currency’ that could be ‘exchanged for oil’ at a more or less fixed rate. This is called the petrodollar era.
But then, in the early stage of the Russia-Ukraine war in 2022, US President Joe Biden announced the seizure of foreign exchange reserves of the Central Bank of Russia. It was an aggressive – and many would argue thoughtless – move to weaponize the US dollar system.
Why thoughtless? Because it will undermine the US dollar’s nature as a global reserve currency. Many powers will no doubt have scratched their heads: what are our dollars worth if our relationship with the USA sours? Will they freeze their reserves for political reasons in the future? Maybe it’s no wonder that net gold inflows to central banks spiked dramatically in 2022 and 2023…
Nation States Already into BTC
So what about Bitcoin, ‘digital gold’ after all? Well, on the mining front things are in flux. Countries such as Bhutan, the UAE, El Salvador, and Russia are leading the charge in state-sponsored Bitcoin mining. But, as far as we know, it’s not in their central bank reserves.
Recently came the tantalizing announcement of pro-Bitcoin…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
