- A key characteristic of a reserve asset is that the reserve asset provides a form of insurance by producing positive returns when other assets perform poorly. For example, a ‘flight to safety’ effect typically causes the US dollar to appreciate during times of economic turmoil as investors exchange riskier assets for safer assets.
- But no asset provides insurance against all types of economic shocks. For example, nominal US Treasury bonds perform poorly in response to inflation shocks. And Bitcoin has historically performed well during two types of economic crises: those related to US bank failures and large-scale US financial sanctions. Bitcoin provides some insurance benefits that other assets do not.
- Bitcoin offers the possibility of self-custody, in which Bitcoin owners personally secure the keys that authorize blockchain transactions. Self-custody reduces the need to rely upon third parties to access Bitcoin, but requires robust cybersecurity practices. Thus, for central banks, Bitcoin offers the promise of some sanctions resistance, particularly if the central bank can readily access cryptocurrency trading infrastructure to facilitate the exchange of Bitcoin for foreign currency.
- Bitcoin does not possess the deep liquidity of the US Treasury market, but its liquidity is sufficient to accommodate transactions in the billions of dollars, comparable to gold. Indeed, Bitcoin may offer superior liquidity compared to many fiat assets that are potentially subject to capital controls. Academic researchers have shown that Bitcoin facilitates the evasion of capital controls in emerging economies. For example, in Argentina, the tightening of capital controls was associated with increased usage of cryptocurrencies.
Bitcoin possesses some unique investment characteristics that could help central banks diversify against several risks, including those related to inflation, geopolitical tensions, capital controls, sovereign default, bank failures, and financial sanctions. To the extent that gold is a reserve asset, so is Bitcoin
https://www.btcpolicy.org/articles/the-case-for-bitcoin-as-a-reserve-asset