In August of this year, Rosanna Costa, Governor of the Banco Central de Chile (BCCh), publicly spoke against laws being discussed in the Chilean congress that looked to limit the use of cash in certain transactions or that would force commercial banks to pay interest (effectively a tax on cash) for the accumulation of cash reserves held in client current accounts.
Ms Costa was adamant in saying that ‘limiting the use of cash for transactions over certain amounts will affect the central bank’s mandate to supervise the normal functioning of the payments system, as well as its role as provider of circulating currency. The payment system must be reliable, secure and robust. Cash is one of the available means of payment that is now complemented via electronic payments, through payment cards and electronic transfers, as well as with other bank documents’.
The President of BCCh concluded that restricting the use of cash ‘...can affect regular and legitimate transactions that are still carried out with cash on a regular basis, with the risk of promoting an informal market and generating exclusion’ and that the ‘…proposed measures may have other effects on the economy that it would be best to avoid.’ Now, one month after winning the presidential elections in the US, future President Trump has promised bitcoin reserves for the Federal Reserve. These, he says, will diversify the country’s assets and allow them to be used as a hedge against economic and geopolitical risks. Scott Bessent, the nominated new Treasury Secretary, said that cryptocurrency ‘is about freedom and the crypto economy is here to stay.’
What is the bitcoin reserve Mr Trump promises for the US and how would it work?
According to the bill currently in the US Senate, this would be a ‘strategic’ reserve of bitcoins. A strategic reserve is a pool of foreign assets that are immediately available and under the control of monetary authorities to meet balance of payments financing needs or to intervene in foreign exchange markets to influence the exchange rate, for example.
A reserve of bitcoins would thus resemble the equivalent of the gold and foreign currency reserves held by central banks. This is where economists begin to differ in their evaluation.
To follow his idea, Republican Senator Cynthia Lummis introduced her Bitcoin Act of 2024 (Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide Act of 2024) in the US Senate, which still has to be approved. If that should happen, then the US Treasury and the Federal Reserve will be buying 200,000 tokens each year for five years, up to one million, which would be added to the already approximately 21 million that had previously been confiscated from a dark web operator.
The cryptocurrency chosen would then have to be incorporated into the mix of assets that the US has on its balance sheet, with the aim of diversifying reserves. The idea is that this reserve would serve as a hedge against the devaluation of the US dollar, to strengthen the US balance sheet and support future debt issuance.
However, with its traditionally high volatility, it appears as speculative as a central bank holding stocks as part of their reserves.
The project, however, is not quite ready to hit the ground and there are basic questions that are still unanswered, such as what US government entity would manage the project and the bitcoins themselves?
Finally, how and with what will the million crypto coins be purchased? Will the US sell other assets such as precious metals or other bonds? Or would the Treasury just ask the BEP to print more money ,which would increase the balance sheet and potentially, inflation?
The mechanism proposed in the bill to buy the cryptocurrency is two-pronged: on the one hand, the surplus that the Federal Reserve’s return to the Treasury (ie. the profits of the US central banking system) would be used to buy bitcoin. On the other hand, it proposes that the central banks of each state revalue the gold certificates they hold to reflect the current market value of the metal: they would then hand over the difference to the Treasury and use those funds to buy bitcoins.
While it is unclear just how carefully Mr Trump has thought this through, this idea has been considered and discussed elsewhere.
As we are all probably aware, Nayib Bukele, President of El Salvador, decided his countrymen should not continue paying in Susan B Anthony dollar coins and made his country the first to adopt bitcoin as legal tender. So far, they have survived.
Bhutan is a very small kingdom that apparently uses bitcoins as well.
China is a wild card, having possessed an enormous amount of cryptocurrency at some point, but it is now unclear if these are still in China’s possession or if they have been sold.
With respect to most other countries, many possess bitcoins or cryptocurrencies for the same reason the US has them: because they have put the previous owners in jail and have confiscated their assets, but not as part of their reserves.
Economists are divided, with the most progressive saying that all governments should have part of their reserves in bitcoins as they are here to stay. Others worry about the volatility that bitcoins normally have and that they will never really be considered a store of value, such as precious metals and other stable currencies.
Finally, other experts believe that the value of bitcoin as a reserve like gold is interesting but unlikely to take hold at central banks. This is primarily because, despite the high price they currently have, they are not reliable as a store of value. It is unlikely that the Treasury will corner the global cryptocurrency market to be able to control prices (and value).
While the United States and Brazil debate the use of bitcoin in their international reserves, the BCCh, in line with Ms Costa’s firm commitment to cash, categorically rules out this possibility, arguing that crypto assets do not meet the legal or technical criteria for their inclusion.
Faced with this debate, the BCCh rules out the possibility of including bitcoin or other cryptocurrencies in its international reserves. The BCCh is a serious central bank, and it is this conservative approach, they believe, that has given them the tools to react properly and as efficiently as possible to be able to live up to their mandate.
The monetary authority further explained that ‘the purpose of international reserves is to maintain economic and financial stability in the face of adverse external shocks and the conduct of exchange rate policy. Therefore, they must meet high criteria of safety, liquidity and quality, as defined by the IMF, to guarantee central banks their immediate availability with limited market impact and efficient access in case they need to be used in periods of crisis’.
Accordingly, the BCCH does not even hold much gold in its reserves as its liquidity is low in case of emergencies.
Since crypto assets lack the essential characteristics of low risk and low volatility, in this context, ‘bitcoin or other crypto assets do not meet the legal criteria to be used in the investments of the Central Bank of Chile.’ The BCCh could not be clearer.
