Central Banks and Bitcoin: Closer Than You Think

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.

See also: Steps to Crypto Recovery: Where ‘We’ Go From Here Opinion

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.