The reserve currency is money that central banks or Treasury bonds hold for international transactions. Argentina will not be able to purchase a Boeing 737 MAX, for example, at a very inflationary peso; He has to pay in US dollars, so Argentina keeps the dollar close at hand, that is, in “reserves”.

The second main function is to maintain the value of the national currency. For example, if the Brazilian real collapses during an economic downturn, Brazil’s central bank could reapply for it by buying the real dollars it holds in reserve.

Can Bitcoin (BTC) fulfill these key functions of a reserve currency? “I definitely think so, at least in the future,” Franklin Knoll, a critical historian and president of Noll Historical Consulting, told Cointelegraph. Bitcoin’s electronic nature makes it ideal for payments. “If gold was used for this before, then this digital gold should work too, if not better.”

Meanwhile, these are unusual times. When markets crashed in the midst of the COVID-19 crisis in March, Bitcoin followed suit. “BTC is not performing well,” Sinjin David Young, CEO of Blockchain, International Cash Reserve, told Cointelegraph. But in early 2021, the world will face yet another circumstance, marked by massive stimulus spending, especially in the US, and if the dollar collapses, according to Young:

“BTC’s position is about the same as the ‘last reserve currency of exchange’ in terms of preserving value, if the surplus of supply in US dollars becomes the only tool to prevent an economic depression when, paradoxically, the market price increases.
“The dollar is still king”
But challenges remain, and Bitcoin is unlikely to ever replace the US dollar. Knoll said, “The current problem with Bitcoin, as with gold, is that very little, if any, commodity or debt is denominated in Bitcoin.” Moreover, in his words, “It is difficult to imagine a future in which most of the world’s trade will be denominated in bitcoins. The US dollar is still king. ”

Jonas Gross, project manager at the Frankfurt School Blockchain Center – a think tank affiliated with the Frankfurt School of Finance and Management – sees little opportunity for any industrialized country to use BTC as a reserve currency in the near future. “Skepticism remains very high,” he told Cointelegraph, citing a recent statement by European Central Bank President Christine Lagarde calling for global regulation of bitcoin, among other things, due to concerns about money laundering.

However, “the dominance of the US dollar as the world’s reserve currency could be in real jeopardy,” Gross continued. China is conducting extensive trials of the central bank’s digital currency, which is its digital currency / electronic payments project, which could be launched as early as 2022 and foreigners can access and use in transactions. In this case, Gross added:

“It would be easy and simple to use the digital version of the renminbi for global payments – transaction costs could be reduced, and the digital renminbi would be quite easy to ‘move across borders’.
However, the RMB needs to travel some distance to catch the dollar. According to an international report, the dollar accounted for 60.46% of the world’s foreign exchange reserves as of the third quarter of 2020, followed by the euro (20.53%), the Japanese yen (5.92%) and the British pound sterling (4.50%). … International Monetary Fund. Yuan ranked only fifth (2.13%).

Since 1450, only six reserve coins have dominated.
Campbell Harvey, professor of international business at Duke University, told Cointelegraph that raising borrowing rates in the United States “increases the risk of being [in dollars] as a reserve currency. This is risky at some point, and alternatives are considered in. “Economic history teaches that global reserve currencies do not exist forever.

In August, information company MicroStrategy announced that it was using Bitcoin as its main reserve capital. In early 2021, former Canadian Prime Minister Stephen Harper raised the rate and suggested that not only companies but also the government could use cryptocurrencies as reserves, albeit as part of a “basket of things” that also includes gold and stocks.

Since 1450, there have been six major global reserve periods, averaging about 94 years. The US dollar was already a global reserve 100 years ago, surpassing the average and nearly comparable to its predecessor, the British pound, which has dominated for nearly 105 years.

Harvey said that it is unlikely that BTC will become a reserve currency itself due to its extreme volatility. Currently, the volatility of the US dollar against 10 major currencies is around 3% -4% annually. BTC is in the 80% – 90% range.

Source: CoinTelegraph