A Bitcoin reserve at the RBA would be useful once cryptocurrencies begin to be incorporated into global capital markets. For example, repurchase agreements, securities settlement and underwriting can all be facilitated with blockchain assets. A Bitcoin balance would simply allow the RBA to participate in some of their traditional market operations, only using a new monetary unit.
Beyond enhancing the capabilities of the RBA, a Bitcoin reserve would also boost the prospects of cryptocurrency adoption elsewhere. As the cryptocurrency network effect propagates, the very fact that a major central bank holds Bitcoin would underscore the value of cryptocurrencies and increase confidence in their long-term viability. An RBA Bitcoin reserve would be a particularly strong signal as Australia is a large participant in global currency and commodity markets. Further, if crypto-denominated transactions became popular in Australian markets, other central banks would feel squeezed to develop their own crypto reserves.
While central banks are not sensing an existential threat from decentralized Internet currencies, the RBA might push back against the plan. In a paper on digital currency issued in 2014, the RBA wrote that due to the multinational nature of Bitcoin and other digital currencies, they would have trouble exerting unilateral regulation over its use in Australia. They suggested using the multinational Committee on Payments and Market Infrastructure (CPMI) at the Bank for International Settlements to coordinate global cryptocurrency regulation. The paper also expressed fear that increased adoption of cryptocurrencies in Australia would dampen the efficacy of the RBA’s monetary policy operations.
While this is one of the first proposals for a Bitcoin reserve, many other nations are researching ways to use cryptocurrencies. The Swedish Riksbank has toyed with the idea of creating their own cryptocurrency, phasing out paper currency. Riksbank Officer Cecilia Skingsley sees fiat-cryptocurrencies such as “eKrona” as beneficial to the efficacy of monetary policy. For example, a digital currency offers simple workarounds for issues like the zero lower bound cash-flight issue (This occurs when a Taylor rule calls for a negative interest rate target to stimulate growth. Central bankers are usually unwilling to lower rates below zero due to the fear that banks will suffer high withdrawals if their depositors are charged interest. A fiat-cryptocurrency can simply be charged negative interest directly.). Other proposals also abound, such as Andrew Levin and Michael Bordo’s paper on a central bank digital currency. However, blockchain practitioners are quick to point out that the whole point of a distributed digital currency network is to shrug off the need for a trusted central organization which can exert various monetary distortions.
Senators Dastyari and Hume should be praised for their foresight and for advancing the cause of decentralized currencies. Incorporating Bitcoin into the RBA’s reserve would further integrate cryptocurrencies into the mainstream economy and accelerate the arrival of a free and efficient monetary system.