central bank of barbados bitcoin
Image credit: Central Bank of Barbados

The Central Bank of Barbados should hold a “relatively small” proportion of bitcoins as part of its portfolio of international reserves, according to Barbadian economists Dr. Winston Moore and Jeremy Stephen.

In a new paper entitled ‘Should Cryptocurrencies be included in the Portfolio of International Reserves held by the Central Bank of Barbados?’ Moore and Stephen, two former heads of the Barbados Economics Society who now lecture at the University of the West Indies, Cave Hill Campus, examine the potential role of cryptocurrencies as part of the portfolio of external assets held by a central bank.

Noting that major financial corporations such as Citibank have started developing their own cryptocurrency, the two economists said:

“Within recent years, the proportion of digital transactions done using digital currencies has grown significantly. As a result, it is possible that digital currency could become a key currency for settling transactions.”

According to the authors, cryptocurrencies have many benefits including security advantages, the ease of use on mobile devices, the relatively low costs of production and transmission via the blockchain, as well as the low long-term inflation risks.

They further indicated:

“The general discourse on cryptocurrencies has led to varying levels of support for the innovation; where some regulators have been very wary of it while the Financial Technology (Fintech) community have argued about the inevitable widespread use of cryptocurrencies.”

Using the case of Barbados, Moore and Stephen conducted a study to assess the viability of including bitcoin in the international reserves portfolio of the Central Bank of Barbados and made a simulation of the effect of holding a proportion of bitcoins in the asset base.

Their findings suggested that “had the Central Bank of Barbados held a relatively small proportion of its portfolio in bitcoin between 2009 and 2015, the impact on reserve balance volatility would not have been significantly different from that experiences due to other major currencies.”

Additionally, the appreciation in the value of the bitcoin portfolio in US dollar would have even enabled the Central Bank to gain a “significant return.”

However, the economists said that due to the rather small proportion of transactions currently done in bitcoin by Barbadians – which is said to not exceed 10% of all transactions -, they recommend the Central Bank of Barbados to hold no more than a “relatively small” share of bitcoins in its portfolio of foreign balances.

‘Electronic digital dollars’

The paper follows the announcement of a collaboration between Barbadian bitcoin startup Bitt and the Central Bank to create an “electronic digital dollar.”

In September, during a presentation at the Domestic Financial Institutions Conference, an annual conference organized by the Central Bank of Barbados and the Financial Services Commission, Oliver Gale, co-founder and chief financial officer of Bitt, unveiled that his company has been working with the Central Bank on an digital dollar in Barbados.

Gale told the audience:

“We are planning to create an electronic digital dollar in Barbados, which will allow people to transact using all of the wonderful innovations of the bitcoin blockchain, but their assets will not be tied to bitcoin’s value – it will be tied to fiat currency, which is issued by the Central Bank and held with a commercial bank in a trust account, which is publicly audited, which means you have a digital IOU.”

Launched in March 2015, Bitt is the first bitcoin exchange in the Caribbean. The company, based in Barbados, launched its exchange platform following a US$1.5 million seed funding round led by local VC group Avatar Capital.

In addition to exchange services, Bitt also offers remittance services and bitcoin payment solutions.

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