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SHOULD CRYPTOCURRENCIES BE INCLUDED IN THE PORTFOLIO OF INTERNATIONAL RESERVES HELD BY CENTRAL BANKS?
Abstract: In most countries, the central bank is required to hold reserve assets as a means of providing credibility for the value of the fiat currency. These assets can be in the form of gold, foreign exchange or some other internationally recognised reserve asset and are held to permit the country to engage in international transactions. Within recent years, cryptocurrencies have been increasingly utilised for international transactions, and it is possible that the use of these cryptocurrencies might expand in the future. This paper therefore examines the potential role of digital currency balances as part of the portfolio of external assets held by a central bank. Using the case of Barbados, the paper also provides a simulation of the effect holding some proportion of their asset-base would have had on the stability of the foreign reserves as well as the return on the portfolio of assets. Subjects: Econometrics; Finance; International Finance; Macroeconomics
Keywords: international reserves; cryptocurrencies; fixed exchange rate JEL classifications: F3; E4; E5