The Central Banks of G7 nations have indicated some possibilities of considering cryptocurrencies so long as there is “appropriate regulation”. As it stands, central banks are not allowed to trade Bitcoin, Ether, Zcash and a few other cryptocurrencies.
However, indications are that with the coming of the New Year 2018, things are likely to change with G7 Central Banks making a foray into cryptocurrency trading in order to bolster their foreign reserves.
A function of Central Banks is to manage, coordinate and service a nation’s foreign reserves. The quantity of foreign reserves a country has determines their ability or otherwise to service their debts. The depth of a nation’s foreign reserve also helps to determine the overall financial and economic stability of the country.
G7 nations are connected on several fronts including areas of politics, finance as well as trade deals and agreements. G7 nations hold huge reserves of each other’s currencies (foreign reserves) and they also hold vast storehouses of gold reserves.
Central Banks, especially G7 domiciled Central Banks usually hold Special Drawing Rights (SDR) and marketable securities which are denominated in foreign currencies such as sovereign bonds, treasury bills, foreign currency loans et al.
SDR values are normally based off five major currencies; the US Dollar, Euro, Chinese renmibi, British Pound and the Japanese Yen.
In 2018 however, it is projected that the market capitalization for Bitcoin will exceed the value of all SDR’s that G7 members have allocated to themselves (approx. $291 Billion) – this is the point where a paradigm shift is being anticipated to occur.
With the consistent devaluation of G7 currencies against Bitcoin and other cryptocurrencies, Central Banks will begin to shift their stance in order to ensure some stability in the resources they hold. Christine Lagarde, Managing Director of the International Monetary Fund (IMF) has already sent out a caution about the disruptive tendencies and abilities of cryptocurrencies.
In 2018 as Bitcoin and other cryptocurrencies begin to emerge as the largest of the world’s currencies, G7 Central Banks will begin to consider being a part of the crypto-action. With cryptocurrencies’ 24/7 trading and no-days-off regime, it makes the space attractive enough for Central Banks to want to participate. It is projected that cryptocurrencies will be a de-facto investment instrument for Central Banks.
Cryptocurrencies are inherently borderless and they facilitate foreign trades much easier as compared to fiat. They will provide much room for Central Banks to conveniently execute international trade agreements, faster and cheaper.
If the current trend of fiat currency values falling against cryptocurrencies persists, G7 Central Bank Governors and other key financial sector actors might be forced to call an emergency meeting to either deviate from current financial instruments or inculcate cryptocurrencies into their portfolio.
Central Banks will likely to make use of the services of private fund managers to make purchases in cryptocurrency markets at the beginning pending the development of the regulatory framework that will guide their new investment mandate.