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Buying of cryptocurrencies by Central Banks – Myth or Reality?

Cryptocurrency markets have now entered a bull run as Bitcoin has set a new record high, passing the mark of $69,300 per bitcoin, and heading for even greater heights

By: EBR - Posted: Tuesday, March 19, 2024

Such investments will not only strengthen the stability of its gold and foreign exchange reserves but will also allow the central bank to earn on the exchange rate difference. Even more than on gold.
Such investments will not only strengthen the stability of its gold and foreign exchange reserves but will also allow the central bank to earn on the exchange rate difference. Even more than on gold.

by Sergey Tron*

Cryptocurrency markets have now entered a bull run as Bitcoin has set a new record high (breaking its November 2021 record), passing the mark of $69,300 per bitcoin, and heading for even greater heights. As is usually the case with market corrections, this has happened at times when investors have tried to lock in profits. A familiar story not only for crypto, but also for mainstream finance, which everyone is used to.

But this time around, the skeptics have vanished, with crypto enthusiasts on the ascendant. Although, to tell the truth, I am personally not in favor of such bursts of greed at exchange peaks. I would like the market to develop in a planned manner, without deviations, as much as I understand that it is precisely such surges that make it possible to win new supporters and investments. Especially since everyone understands that this is just the beginning, and there are basic factors that will stimulate the price of BTC.

Nevertheless, February and March 2024 are interesting and will be remembered not only for this. It is remarkable that against the background of the growth of Bitcoin prices in the financial market, there is also talk of a new trend, I think, towards which the market may move in the future: the purchase of cryptocurrencies by the central banks of various countries to add to their gold and foreign exchange reserves.

The logic is simple and clear: if in moments of global instability, one of which we are currently experiencing (due to geopolitical and economic problems), a government buys gold in bullion, then it should also buy digital gold – Bitcoin. Such investments will not only strengthen the stability of its gold and foreign exchange reserves but will also allow the central bank to earn on the exchange rate difference. Even more than on gold.

Buying digital currencies from central bank reserves is a novel idea. Some may call it strange or even far-fetched, especially in the context of legal unsettlements related to crypto in most markets. However, I like the formulation of such a question, even if it is hypothetical.

The idea, by the way, is not born out of nowhere, but after the appearance of the January report of the World Gold Council. It notes a two-fold increase in net purchases of gold by the world’s largest central banks for the first month of 2024: from 17 tons (in December 2023) to 39 tons (in January 2024).

In fact, six central banks purchased more than one ton. The biggest buyer was the Central Bank of Turkey, which purchased 12 tons of the precious metal and increased its total reserves to 552 tons, with the People’s Bank of China in second place, acquiring 10 tons, bringing its gold reserves to 2,245 tons.

Other central banks took a little less metal, but still increased their reserves solidly: the Reserve Bank of India (9 tons), the National Bank of Kazakhstan (6 tons), the Central Bank of Jordan (3 tons) and the Czech National Bank (almost 2 tons).

In December 2023, the price of gold on the world market was in the range of $1980-2088 per troy ounce (31.1 grams), in January-February 2024 it moved in the range of $1987-2056 per troy ounce, and in March it reached $2156 per troy ounce.

At the same time, the forecast price ceiling for this year is considered to be $2,300-2,400 per troy ounce. These are not bad dynamics, but they are far from impressive from the investor’s point of view. The crypto market lives with different dynamics and perspectives. Therefore, the idea of investing at least a small

part of the central banks’ currency reserves in digital assets looks promising for investment reasons.

Even if there are small purchases of at least one Central Processing Unit (CPU) within the framework of a small experiment, one such step is enough to dramatically change the attitude towards cryptocurrencies not only in the classical financial market, but also in society in general.

The management of the Bank for International Settlements (BIS), which is also called the central bank for central banks, urged its colleagues around the world to pay attention to the crypto market and monitor the situation on it back in 2017.

And in 2023, its chairman Agustin Carstens openly recommended to the governments of all countries of the world to create a regulatory framework for the introduction of digital assets and to harmonize these frameworks as much as possible across the globe (so that the regulations are consistent or at least not strongly contradicted in different countries), in order to promote the development of technologies.

It should be said that the central banks listened to the BIS – of course, each in its own way. But the majority realized that financial regulators are simply obliged to move towards digitalization. At the current stage, they are unlikely to take the risk of buying Bitcoin or other free coins of decentralized systems, as in most countries the regulatory framework for this has not been created.

However, many central banks are actively working on options for introducing their own digital currencies (the central bank is the issuer) — the so-called CBDC (Central Bank Digital Currency). The BIS survey showed that 93% of all central banks in the world are working on this issue at various stages. This is such a colossal majority.

So far, we are seeing trials and experimental launches in individual countries. Of course, this is a trial-and-error method. But the main thing is that the process has started, which can only be welcomed.

It may take years, but the world’s CPUs may move from experimenting with centralized digital assets to experimenting with decentralized ones. The crypto market is developing so actively that soon the regulators will simply have no choice, and they will be forced to do it. Carefully, step by step, it will start with countries where there is already political will for the large-scale introduction of Bitcoin and other cryptocurrencies, like Argentina, for example, but later others will pick up the baton.

If everything is done correctly, they will certainly join in, because they will see how important and useful it is for national economies. I do not think that everything will be easy, and I am sure that the officials of different countries will break many more misconceptions until they adjust the regulatory framework and shape the market. But the main thing is to start the key processes.

The future is indeed huge for the global digital market.

*Founder of White Rock Management with a focus on sustainable Bitcoin mining

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