Economist Jeremy Stephen is suggesting that had the Central Bank of Barbados taken up a suggestion he made several years ago to include a relatively small amount of digital currency in its portfolio, the country’s international reserves would not be at the uncomfortably low level they are at today.
Delivering the third quarter review of the Barbados economy on Tuesday, Acting Governor of the Central Bank Cleviston Haynes reported a decline in the foreign exchange reserves, which he said stood below the desired 12 weeks of import cover at just 8.6 weeks or $549.7 million at the end of September.
In the paper entitled, Should Cryptocurrencies be Included in the Portfolio of International Reserves Held By the Central Bank of Barbados? Stephen and fellow University of the West Indies lecturer and economist Dr Winston Moore had suggested that the Central Bank should include some form of cryptocurrency, such as Bitcoin, in its reserve assets.
Based on the significant growth of digital transactions done using cryptocurrencies and the possibility that digital currency could become a key one for settling transactions, the academic duo had made the suggestion, which they felt would also help to safeguard the Barbados currency, which is pegged against the US dollar, against speculative attacks.
Making an assumption that 0.01 per cent of reserves were invested in Bitcoin from November 2010 to April 2015, Stephen and Moore explained that the volatility of the reserves would have been “quite similar” to that of any of the other three major currencies held by the Central Bank of Barbados, namely the Canadian dollar, the British pound sterling or the Euro.
However, they said the Bitcoin reserves at the end of April 2015 would have been $291,926, or more than 20 per cent greater than if they were held in any of the other major currencies.
Nonetheless, Stephen told participants at the second annual Innovate Barbados conference at the Lloyd Erskine Sandiford Centre on Wednesday that the paper was basically rejected by then Governor of the Central Bank Dr DeLisle Worrell, but gained traction online and was now being examined in other countries.
“A paper that I did with Winston Moore became the third most popular paper in the space two years ago because the people on Reddit just pushed it. They couldn’t believe that two economists said that the Central Bank of Barbados or a central bank could make money from holding cryptocurrencies,” he said.
“In fact, if the Central Bank of Barbados had held Bitcoin when we had advised them to . . . if they had held only four per cent of their reserves, four per cent of those back in 2012 in Bitcoin, the Central Bank would have been profitable every year for the past six year. Profitable every year.
“We showed them the math and [then] Governor Worrell looked at said ‘good math’, and we kept on losing reserves,” he added, while stressing the importance of using online platforms to get more international presence and to help grow a business.
At the end of December last year the Central Bank’s stock of international reserves stood at $681 million or 10.3 weeks of imports. After a slight increase to 10.7 weeks or $705.4 million, the reserves again dipped to $635.5 million or just 9.7 weeks of import cover at the end of June this year, before plummeting to their current low.
While acknowledging that investing in cryptocurrencies could be “risky”, Stephen said it would have been worth it.
“Now the Central Bank of Barbados would have had reserves boiling over, but that paper ended up resulting in research being done by the central bank of Canada. Mark Carney (now governor of the Bank of England) and those guys at the Bank of England did a lot of research based on that paper. It was a very celebrated paper,” said Stephen as he spoke to participants on the topic Show me the Money on day one of the two-day event.
Recently, the economist revealed that he was one of the major players behind a controversial United Arab Emirates (UAE) alternative financing proposal by Cabinet minister Dr David Estwick.
However, like the cryptocurrencies proposal, that too never saw the light of day.