Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Jeremy Stephen & Winston Moore: Barbados, Bitcoin and Central Banking

Episode Date: March 7, 2016

For orthodox Bitcoiners central banks are often seen as the incarnation of evil. But , alas, in the case of two Carribean central banking economists the feeling of reprehension wasn’t reciprocated. Winston Moore and Jeremy Stephen were formerly associated with the Central Bank of Barados and fascinated by the potential of cryptocurrencies, they explored the consequences of their central bank holding Bitcoin as part of their international reserves. They joined us for a discussion of central banking, the pecularities of monetary policy in a small island nation and what Bitcoin could bring to the equation. Topics covered in this episode: The function of central banks The role international reserves hold for central banks The peculiar challenges of central banks of small island nation states How speculative attacks on central banks work Why central banks may want to hold cryptocurrencies as part of their portfolio How Bitt plans to issue Barbados Dollar using the Bitcoin blockchain and the open asset protocol Episode links: Paper on inclusion of cryptocurrencies in international reserve portfolio of Central Bank of Barbados [PDF] Barbados Cryptocurrency Startup Bitt Bitt launches Barbados Dollar on blockchain Winston Moore's Website Jeremy Stephen's Website EB Episode 83 with David Andolfatto on Fedcoin and central bank issued cryptocurrencies This episode is hosted by Brian Fabian Crain and Meher Roy. Show notes and listening options: epicenter.tv/121

This is Epicenter Bitcoin episode 121 with guests Winston Moore and Jeremy Stephen. This episode of Epicenter Bitcoin is brought you by high.combe. Protect yourself against hackers and safeguard your identity online with a first class VPN. Go to hide.m.m.m.m. and sign up for a free account today. Welcome to Epicenter Bitcoin, the show which talks about the technologies, projects, and startups driving decentralization in the global cryptocurrency revolution. My name is Brian Fabian Crane. and I'm Meher Roy. Today we are joined by Winston and Jeremy, who work at the Department of Economics at the University of West Indies.

Winston is the head of department and Jeremy is a lecturer there. Recently they came out with a very interesting paper which went through the arguments, reasons and models supporting and arguing against the idea that whether or the central bank of Barbado should hold Bitcoin in its portfolio of international reserves. We found that this was a very interesting topic because central banks holding cryptocurrencies could be a very big idea and this is one of the first papers that attacks this idea systematically. So we'd like to discuss their work and but before that perhaps we should have an introduction from the two of them.

Winston can we have your introduction? Sure. Winston Moore, as you said earlier, from the University of West Indies-Cathville campus. I've been a lecturer here for the last nine years now, teaching primarily courses in the area of industrial development and private sector development issues. My main research interests are in the area of applied econometrics, looking primarily at issues, again, related to private sector development, finance, and environmental and resource issues.

Great. And Jeremy, your introduction? Hi, yes. I'm Jeremy Stephen, also from the Department of Economics at the University of the West Indies. And I'm a lecturer in banking and finance. My interest, my research interests primarily revolve around technology, software development, ironically, and how they interact and interface with financial markets and also economic markets as well, economies as well. I'm going to, and as a matter of interest in the near future, look at how the Internet of Things can impact on economic environments, particularly in small vulnerable economies.

Great. So before we start the podcast, perhaps it's nice if you just describe us the monetary landscape of the West Indies and the Caribbean, like what islands are there, what kinds of currencies they use. This is mainly for listeners. and like interviewers like me who've actually never been there. So we'd just like to know the landscape. Lord Winston, you go right on at first.

Okay, the Caribbean is essentially made up of small island developing states. And most of these small island developing states because of the vulnerability that they face. So they face vulnerabilities coming from natural disasters, hurricanes, storms, earthquakes and so on. as well as from external shocks. So, for example, international oil prices. So because of those vulnerabilities, a lot of these small other states in the Caribbean

tend to either have a fixed exchange rate or some type of control over the exchange rate regime. And the reason for that is in a very small market, you cannot end up in a situation where there is very little trading in terms of your exchange rate in that particular market. So there could be a lack of foreign exchange. So historically, most Caribbean countries have sort of gravitated towards fixed exchange rate regimes.

There's also sort of overarching issue in relation to fiscal issues and debt finance as well. Because when you're faced with those external challenges, it tends to lead to the accumulation of a lot of debt. and therefore there's a significant relationship between debt accumulation and the monetary developments in the Caribbean as well. Jeremy, you want to? Yeah, for sure. Yeah, so just to look at the differences, again, each country tends to either have its own domestic currency or even more particularly, they would be trading with the US dollar. So currencies that you figure are global currencies such as the yen, the pound, euro, even to a slightly less extent rubles, even Brazilian real, which you would expect should be dominating South America. They are almost non-existent in this part of the world.

So if it isn't the Trinidadian dollar, for instance, in Trinidad, or if you don't have the Guyanese dollar, and yes, we consider Guyana to be part of the Caribbean because of the cultural linkage. Haiti would also have its Haitian franc But outside of those domestic currencies The next popular currency would be the US dollar Simply because the USA tends to be a major trading partner for the majority of our islands We're not too far away from them And the relationships between Our markets here and South America are only now beginning

For the exception of But for the exception of the Dominican Republic and Cuba they might have probably some Colombian pesos or they trade it more actively with Venezuela, more actively with Peru, more actively with Ecuador. So therefore, they would hold a basket of currencies that typically would not be found in English speaking. And I would even go further to say the French-speaking islands, which would hold euro more so than US dollars because of their strict trading relationship with the French, well, France. So when you talk about holding money in this context, are you talking about the central bank holding money or commercial banks holding money or who exactly are you talking about? Yeah, that distinction has to be made clear. You look at it throughout the entire private and public sector.

So monetarily, your central banks, depending on your trading partners, your central bank would hold a basket of currencies that would reflect a certain demand for a particular currency. So with the case of Barbados where, although our major trading partner in the sense is England because of tourism and Canada to a lesser extent because of tourism, we import, we are very import-dependent country. So therefore, we tend to hold more US dollars than anything else. And for example, our commercial banking sector, the private sector site, that tends to finance more so the import side of the economy. So therefore, they would hold even probably, it will be skilled. even more towards US dollars than any of the currency that would have made up the basket of currencies at Winston and I looked at. And in Trinidad and Tobago, it's going to be slightly different in the British Virgin Islands, which aren't independent, they would tend to hold,

although US dollars might be traded there significantly, they would tend to probably hold as a greater portion of their basket of currencies within their own, well, they don't really have their own currency, union per se, but within their own commercial banks, they would significantly more pounds as opposed to how Barbados would treat it if you see where I'm coming from so each island has a very particular macroeconomic case and a monetary case that um for all of our uniqueness but we've got as well a small currency union within these all of these islands uh called the OECS the organization of eastern caribbean states and they have their own central bank and it comprises of just around 10 sovereign different areas, basically.

Evolving St. Vincent, Grenada, some countries you've heard of before, Grenada, St. Lucia, Dominica, Antigua, and Barbuda, St. Kitts, Anguilla, which is, well, observant, and also a colony of the United Kingdom as well. They have their own monetary policy that tends to affect each island similarly, but at the domestic level, each of their ministries of finance will try to fulfill their own objectives based on what the government, not the governing, what the overarching Eastern Caribbean Central Bank wants to achieve. So it's a very complex situation. And more I talk about it is, funny enough, I realize how complex it is. And we are actually doing a project looking at how to standardize

this complexity in terms of economic indicators. But it is a complex area and one that we figure in the near future should try to find some harmony financially to allow us not only to avoid the vulnerability that this that really characterizes our other states but more so to allow us to be competitive globally in the financial markets. One thing that I'll add to that as well is that a lot of transactions in the Caribbean are actually settled in US dollars. So even say for example if barbit is purchasing a product from St. Lucia, we don't trade there's no Caribbean dollar to settle transactions so therefore transactions between Caribbean states is usually settled in US dollars so therefore that is

why the US dollar is also so important in relation to reserves of most Caribbean central banks so how does holding so why do central banks foreign currency reserves and how does that differ in the reason that you know like your countries there, you know, small countries that do a lot of trade in US dollars, do they hold foreign reserves for different reasons than, for example, a country like United States? Sure. So there's first the, we're holding foreign exchange reserves because we have an exchange rate peg. So the central bank of Barbid is written into the essential bank of Barbies at the Central Bank of Barberians at the Central Bank would, stands ready to exchange two Barbados dollars for one US dollar. So if you go to the central bank with your

US dollar and you want to convert that to Barbados, you'll get two Barbados dollars. If you go there and you want to purchase one US dollar, you have to hand over two Barbados dollars and that is central to what the central bank is doing. Now, I spoke earlier about the issue of vulnerability. Caribbean countries are very vulnerable to external shocks. So say for example, there is an increase in oil prices. If that occurs, the central bank needs to have enough foreign exchange reserves within its holdings in order to make sure that we can still continue purchasing the oil that is necessary for our local production. So reserves therefore serve as sort of like a stock that you can draw on,

when things don't go your way, when there's an increase in oil prices, when there's a hurricane that affects the island. It's sort of your savings that you have as an individual. Then the Centribein also holds those reserves as a means of smooth and out fluctuations. So as a small open economy, a lot of our transactions are based on purchasing imports from outside of the country, which then go into domestic production. In order to purchase those imports, we need to have foreign currency to purchase imports from the US, Canada,

even other Caribbean countries. And we don't want a situation occurring where a company and Barbados wants to purchase a good and there is not enough foreign currency to make or to complete that transaction. So to prevent those sort of issues occurring, we need to hold international reserves of various currencies to complete those transactions. Now, I think contrasts that with a country such as the United States.

The United States dollar is an international reserve currency so that individuals outside of the United States still stand ready to accept the U.S. dollar for the settlement of transactions. There is no way that someone outside a bar-based would accept the bar-based dollar to settle international transactions. So we don't have that benefit. So therefore we have to hold international reserve to settle our transactions. And a very fundamental bit of our economic policy. And Vincent very much explained it, but I really need it to be said in this way. A central bank, all central banks, federal reserves, whatever you call them, they have one mandate, one chief mandate, and it's to be a lender of last resort. So even in the United States of America,

if there were some speculative attack, God forbid, on US dollars, then Janet Yellen has the responsibility to either influence interest rates in the market in a way where it increases the demand for US dollars. And that has been the case that has led to their own recovery. So they also protect themselves really using monetary policy. Protect at least to provide a monetary policy. So what we do at the level of the island is really not just to raise. replicate their reasons because again there's a huge demand for their currencies the euros the pounds even the south african currencies even brazil's real pesos there's way more demand for those we are not as vincent said just no enough of a global player in exports because we hardly export

anything but just services really um we are not enough of a global player to say well then there's no reason to hold us dollars because we could always earn us us dollars easily and if need be, then we could have a floating currency, like what most countries have, because we can then allow our currency to lose value so we can earn more US dollars. So it's a very interesting dynamic. Some islands in the Caribbean, because we spoke to Barbados, adopt a floating regime. Again, I said islands, but countries, but Guyana that we consider to be part of our region, they're floating. They are probably the purest example of a floating currency regime, just like what you get in Europe, States. And the reason they can do so is because they're competitive when it comes to commodities.

They export heavy amounts of gold, heavy amounts of sugar, although that's flagging, and they do well in coconut oil in terms of value added, so they could afford to float. But Barbados can't. Trinidad did a dirty float because there were a dirty float, meaning it was still managed somewhat by their monetary authority. And the reason for that was simply because they were competitive in oil. They're a major natural gas and oil producer, globally not one of the largest, but enough to at least be a significant player. Let's take a short break to talk about hide.me. Look, when you're choosing a VPN provider, you want to make sure that your privacy is protected. If a government agency tries to force the VPN provider to hand over some of your traffic or browsing information,

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And of course, if you're paying with Bitcoin, then you're completely transparent. And so what we suggest is if you're creating an account with Hyde.m. If you want that extra level of privacy, just make a fake Gmail address and use that to sign in. So that way, you're completely anonymous. You can give Hitomi a try with their free plan. Their free plan includes two gigabytes of data at unthruddled bandwidth. You can use any of their free exit notes, which are in Amsterdam, in Singapore, and in Montreal, and you can sign up for that at height of me slash epicenter. Now, if you use RURL, and if you decide to go premium down the line, it's going to get you 35% off. And the premium plan gives you a lot. It gives you unlimited data. You can use as much as you want.

You can connect up to five devices, so your whole household fits on the platform. plan and you can use any of their exit nodes all over the world and they've got like 30 of them. And of course, you can pay with Bitcoin. So give it a try. We would like to thank Haito Me for their support of WebSend of Bitcoin. Let's zoom it into Barbados because your paper deals with Barbados. Can you give us an idea of the order of magnitude of reserves the central bank holds, like, you know, is it like, how much is it roughly? and what happens if in a crisis these reserves are depleted what happens then okay so I will

answer your last question first so remember the central bank has to stand ready to exchange one US dollar for two US dollars so if there are no reserves the central bank cannot fulfill that mandate and therefore the peg will basically disappear There's no way that we can maintain the exchange rate peg of two barbets dollars to one US dollar because the central bank cannot defend that peg. There's nothing to maintain it. So you would then revert back to a freely floating exchanger regime that Jeremy would have mentioned earlier. So the central bank and barbeys in order to avoid that occurring has a sort of rule that they tend to follow and it is based on your market imports that come into the country. on a weekly basis. So we try to target at least 12 weeks of imports so that just in case we don't receive any additional inflows of foreign exchange in a particular period. If suppose there is zero inflows of foreign exchange for 12 week period, we will still have enough foreign exchange to purchase all of our imports over that 12 week period. That's all it's suggesting.

At the moment, our reserve cover is around 17 weeks. which provides us a little bit of a buffer over the minimum reserve cover of 12 weeks. Now, you can ask the question of whether or not the 12 weeks is sufficient. And as a country, we tend to or we try to maintain the foreign exchange reserves a bit higher than the 12 weeks because we understand the fundamental vulnerability of small states. So a year or two ago, I did a paper looking at this issue of, the optimal reserve cover for small states as well. And it suggests that that 12 weeks is actually a little bit too low for small countries

because small countries face so many external shocks from oil prices to natural disasters. So yes, 12 weeks is a benchmark that we use, but we sort of use that as a minimum floor. And we try to hold reserves over and above that level to ensure that we never get to that scenario where you cannot defend your exchange rate pay. So 12 weeks, what does that correspond to or 17 weeks in terms of GDP? How many percent is that? There's not a statistic that we normally calculate, but I guess you can do a rough mental calculation. Barber this is GDP is around $8 billion.

$8 billion. $8 billion. $4 billion. Yeah, for $4 billion U.S. thereabouts. Exactly. And the reserves are just over $1 billion. billion dollars so like one-a-f of that is is held in international reserves so as a percentage of GDP then it would be you said a billion so one-a-f just around 200 million

barbedish dollars out of eight billion so just less than 10% say less than five say about 2.5 3.5% of GDP thereabouts just roughly the reason why we really don't look at it in terms of of GDP is because you're generating reserves using from your economic activity, but you're also consuming reserves as you import more goods and services. So the usual benchmark is to put your international reserves as a ratio to imports of business services. Because remember, the major mandate again is to be a lender of last resort. So you want to know if the economy had to stop working all of a sudden.

So to point to the same example Winston made with respect to natural disasters, how long could we afford to import things when, well, when the economy just stops, basically. So that's why the weeks of imports are probably even more important to us than that ratio that's being suggested. Yeah, perhaps like we could think of it like this. like if you imagine a small island that depends exclusively on tourism and Barbados is not probably like that but if it depends exclusively on tourism and suddenly a natural disaster strikes and tourists stop coming and they stopped coming for like three months now so there's no way like money from outside is coming into the

economy so the central bank is like this giant battery that has some kind of energy and it can still kind of drain that battery and import things that the citizens need. That may be oil, it might be some kind of construction material or whatever. And so 12 weeks might mean that in that situation, the imports can go on for 12 weeks. And after that, should a situation occur where the reserves are completely drained, then the island cannot import anything anymore, basically. and the prices of everything shoots up on the market inside the country. Well, probably more so, it's more correct to say a minimum of 12 weeks

because remember our commercial banking sector would also hold US dollars. The reserves are an account at the central bank itself. So it just means if called upon, the central bank can afford to supply or finance 12 weeks of imports. Well, let's talk a little bit about cryptocurrencies and, and Bitcoin and how that comes in here. So yeah, just from a, from a, I guess, very taking a step back, how do you guys as people involved in central banking think about something like Bitcoin? Well, I am very pro Bitcoin.

Thankfully, I left central banking a long way ago, Winston just before me, but he was in it for a little bit longer and possibly tainted. But I'm very pro crypto, Not necessarily Bitcoin because no, you've got the beautiful invention of Ethereum and I'm quite sure someone else in the near future will solve a problem. I'm very pro cryptocurrency because it really helps the issue, it helps a small country if the issue of velocity. What I mean is, in small Caribbean countries, we have a very bad culture when it comes to e-commerce. Most commercial banks are very, very anti-ecommerce. They see it as being costly.

There's not enough of a population per country. I mean, there's only two English-speaking Caribbean countries that have more than 1 million people, Jamaica and Trinidad and Tobago. So they are very anti-ecomer solutions for domestic markets. And the issue has been that most people would have found a need to go into PayPal and have their finances. stored overseas, then you've got the issues of tax avoidance and tax, not tax avoidance, sorry, tax evasion and other non-economic issues that come up and that will feed into economic issues. The whole prevalence of a cryptocurrency reduces the cost of transactions and it allows businesses

to set up very cheaply in Barbados as the example would be a bit and provide to the Barbadian business person, small business person, or even like, larger companies at access to their own customers domestically. It also helps with the whole phasing out of cash, which is expensive for our central bank to produce coins. For instance, are very expensive. And our central bank over the last two years has phased out at least our lowest denomination the one cent. So it's becoming more costly for central banks to produce money, even actual physical cash, paper cash. and our central bank hasn't been that profitable for five years or so,

so they're finding ways and means to ensure that they stay viable. And I'm saying that, at least from my point of view, without even referring to our work, our paper, the whole idea of a central bank embracing digital currencies, cryptocurrencies for security purposes even more so, smart contracts, it helps. I even think our government things should look at, really using smart contracts to verify things like land purchases as you would see in Honduras

or to verify contracts. You know, it would help in terms of the whole issue, lessening tax evasion, which is a prying issue in Barbados. And in fact, I wish to study it a bit more in the near future with respect to the entire Caribbean. Vincent, your thoughts? Yeah. My thoughts in relation to Bitcoin and one of the things that we've mentioned in the paper was the whole idea of diversification.

So we spoke a lot about the Central Bank holding international reserves earlier. And the Central Bank holds those reserves in various currencies. It holds it. You have holdings of U.S. dollars. It'll be denominated, sorry, in U.S. dollars denominated in the palm, those type of things. But, you know, when the U.S. dollar exchange rate changes relative to the pound or relative to the euro, then our reserves are affected. So by holding another currency, it sort of provides us an opportunity to diversify our holdings of foreign exchange reserve so that we're no longer holding just US dollars and therefore subject to the volatility and the bilateral exchange rates.

We now have another currency that we can hedge against that volatility. So that's the first thing, the diversification benefit that can come about from holding Bitcoin. And over the long period that we looked at in this study, relatively long period that we looked at in this study, the level of volatility that we saw in Bitcoin wasn't that significant from what we observe in other currencies. So it does seem to have some potential benefit there, and we crunch the numbers in the paper and reported the results. The other benefit that we can also mention that can come about as well. And this one is an area that has not occurred as yet, but it is something that we mentioned in the paper. And this is the idea of a speculative attack.

So one of the reasons for holding your reserves is that you want to defend your exchange rate pay. So we can always say that whenever you're ready, you can come to the central bank and exchange your $2.5.00 for $1.000. US dollar holding reserves in in Bitcoin allows us another angle to say protect against such an attack because someone can say for example through their Bitcoin wallet they could head bet against the devaluation of the Barbados dollar there's no way for the central bank of Barbas to protect against that at the moment because they don't hold any Bitcoin. So usually one way you can protect against attack on your currency is to basically hold that other currency. So if someone wants

to attack the Barbiss dollar using US dollars they would we need to have enough US dollars to defend against that attack. So therefore what we're proposing here is that we have enough Bitcoin to defend against such an attack against the Barbitous dollar. Now that is something looking very far into the future because There isn't anything that is really, sorry, I just want to mention this as soon as I say that, because there's not anything that is even very remote possibility. It is not a very major issue to look at as yet. Because we have for an exchange controls in Barbados.

So you first have to be able to purchase barbiz dollars in order to do that and you need to get those barbiz dollars then converted into Bitcoin and With our foreign exchange controls that is going to be a very difficult thing to do in any significant way So the possibility of a speculative attack against the Barbace dollar is Something that is a very it's not even a significant possibility at the moment using Bitcoin, but it's something that we sort of mentioned That could become an issue in the future. Actually, it is even more of an issue now because of the colored coin protocol. And it depends on, like, people like BIT.

This bit we did not mention in the paper, but this became very relevant to me after I found out how BIT, for instance, as a company, was transferring or being able to convert Barbadian dollars into Bitcoin? Let's just do, just very briefly, can you talk, give a few sentences about, about what Pitt is and what they're doing and how that relates here? Oh, yeah, so it's the first Caribbean, well, the first digital asset exchange in the Caribbean. I think they're way more than a crypto currency exchange. So it's a digital asset exchange founded here in Barbados by two Barbadian entrepreneurs,

Gabriel Abed, who seems to be rather popular in the Bitcoin community and his finance guy, Oliver Gill. So I'm also, as a matter of disclosure, a consultant to bits. And very early in their life, they would have been consulted me on different regulatory issues and also looking at economic impact. In fact, the same color coins protocol they chose came about because of questions they asked them as to how they would plan to convert. Now, the good thing about Bit at its current size is that it's not large enough a, let's say a broker, if I can call it that, or an exchange, I should say. to have the large amount of convertible Barbados dollars into Bitcoin and Bitcoin into US they're not going to have as much as the central bank can so in that respect

the central bank isn't under any immediate speculative threats but for argument's sake if Bit becomes that say if bit is able to hold in their reserves or in their buffer 10 billion US which I don't think will happen that quickly but for argument's sake if they're able to convert up to 10 billion US on demand in Barbadian dollars then somebody through bit could actually become a threat what that calls for then is that and a bit I'm glad they've been very open they have K YC they have an infrastructure that allows regulators if they ever wish to to be able to look into Jeremy define Jeremy

define K YC sorry know your know your customer an anti money laundering term knowing your customer. So it's very open. And what that has done, at least Gabriel could easily defend it, is that it allows any regulator if they are feeling a possible threat to be able to supervise, not necessarily supervised, sorry, to see what Bit is doing. But as it stands, Vincent, it's correct. In the near term, there can be no speculative attacks on the currency. In the future, it would be the central banks. And this is the reason why we motivated, we were motivated to write this paper. in the future, central banks across the Caribbean would have to become even more aware that these things can be possible because money, in terms of velocity, will be flowing a lot more freely across the Caribbean.

And from a global market where you guys are down here without any friction, without anybody slowing it down. Once it can be matched, once they can find enough Barbadian dollars to match your order, if you're sending money here, they will do it. Cool, those are very interesting scenarios like, you know, perhaps, I mean, my mind is like Bitcoin is too small to today, you know, you know, launching speculative attacks off Bitcoin might be difficult, but yeah, maybe one day when it's big, I think these kinds of scenarios could definitely occur.

Oh, not just Bitcoin, Meher, remember, it's any cryptocurrency. These guys are just, these exchanges are built into several blockchains. So the problem is the cumulative effect of all currencies, the paper focused on Bitcoin. And yes, again, Winston is correct that no, it wouldn't be. If there's 21 million units to be produced in the near term, there's no way that Bitcoin would be a threat. But I'm talking about all cryptocurrencies. I'm talking about Ethereum. I'm talking about like coin, Dodge coin, Bitcoin.

All of them combined eventually can be an issue for small countries like Barbados. Can be, if not. And it is an issue that was also mentioned in other papers as well. There's actually a paper that we referenced in our study that suggests that the IMF International Monetary Fund should actually consider holding some type of cryptocurrency in their reserves as well. So it's an issue that has been discussed in the academic literature as well. Right. So just a little bit more on this.

I don't understand what exactly you mean here. So how would this speculative attack using cryptocurrency or blockchain backed assets or something? How would that practically work? Okay. So Winston mentioned before that we have foreign exchange controls. The way a foreign exchange control works, because it is not widely practiced globally, Greece to a lesser extent. And yeah, Greece is probably the most prominent example of what. what foreign currency controls are.

But essentially your central bank or your government says, you can only get this amount of US dollars right now. So, okay, let's look at it this way. Imagine I am somehow upset with my economic situation locally. I don't like how things are going. I could, if I'm a multi-millionaire, decide I will go to my commercial bank, I will like all of my money sent out

US dollars. Therefore, the demand for US dollars, if I'm a multi-millionaire in a small country-late Barbados, it would be significant. So the demand for US dollars increases, making in a sense, the value of the Barbadian dollar less. So in a sense, so I have launched essentially if allowed a speculative, an attack on my own currency. Now, I'm not doing it for gain, but remember, but if it were that I wanted to buy by a billion dollars cheap and sell them and sell US dollars expensively for profit, I could do the same thing, except the intention would be different.

So what I do, I go on and if I get permission, money sent overseas. The central bank is always aware of how much US is in legal circulation. So therefore, they could easily step in and say, Jeremy, you're rich, but you're too rich, you can't send all that money overseas right now. We'll only allow you X. Or, depending on your reason, you will not be allowed to send this money overseas.

Now, imagine Bitcoin and it's unregulated. My God. What I know could do is I can go to companies a bit or any other digital registry, digital asset exchange, sorry, that sets up here in the Caribbean or in Barbados and says. And I say, I go up to these guys,

hey, I've got X among the Barbados dollars on me right now. I can write you a check for 10 million. dollars which it can do legally here and once it moves the 10 million moves from one Barbadian hand to another Barbadian hand the central bank is never involved so unless it is it comes down to some kind of anti-money laundering thing what I then could do is I go out a bit I give 10 million US BIT can send that money via Bitcoin overseas and in their overseas accounts 10 million well five million US 10 million Barbadian here so five million US then is a outside of the country.

What that then does if the market, if the market, if the banks become aware of that transaction, it in effect puts pressure on the Barbadian dollar. In other words, the demand for Barbadian dollars fall and they raise. No, it can happen. The US dollar raises in value.

So it can happen from another way around where somebody decides through Bitcoin using the same asset exchanges to purchase a lot of US dollars and sell these US dollars through the exchange and get a lot of Barbadian dollars. Or they can then wait for some time, sell Barbadian dollars very quickly and end up purchasing a lot of US dollars off of the exchange very quickly as well. It causes the value to become unstable and the Central Bank therefore cannot defend it because

at no time is the Central Bank's resources nor our commercial bank resources locally drawn upon. but the Barbadian dollar is being manipulated in value versus anywhere else. So then it could be the case where to that for argument's sake, or commercial banks decide to go through, if it's unregulated, they can decide to go through BIP if they want to get access to easy US dollars overseas. And therefore then it becomes much more difficult for the central bank to defend the currency whilst they are able to give permission. for that current floor for US dollars to be in circulation yeah yeah yeah perhaps I

could I could I could describe this a bit differently okay so so so so the so the so basically the interesting scenario is when you have companies like Bitt or maybe the future ones that start to issue Barbadian Bavillian dollars on the blockchain and the blockchain itself is and and you have you know some kind of exchanges running on the blockchain itself like it becomes very easy to exchange barbillion dollars for Bitcoin and the other way around and maybe even in the future it becomes easy to short sell barbillion dollars just using the Bitcoin blockchain so for our

listeners that that haven't heard of short selling it's basically I borrow some asset like a barbillion dollar and I sell it on the market and I and the person from whom I borrowed I promised to repay Barbillion dollars let's say three months down the line. Now maybe like short selling the barbillion dollar on the Bitcoin blockchain might be a possibility that opens up in two or three years if with the colored coin protocol, et cetera.

And basically then what happens is all of the international speculators maybe for the first time get the ability to short sell huge amounts of Barbadian dollars. This ability they don't have today because of the way the central banks can control the flows of money, inside Barbados, but on the Bitcoin blockchain they really can't. And therefore if a lot of them like engage in short selling barbillion dollars on the

Bitcoin blockchain, then that in effect becomes a speculative attack against the currency of Barbados, right? That is a very good explanation. Yeah, it's basically the same thing. Yeah. And and just one more thing, right? The reason why this is a threat is because Barbados, doesn't hold, you know, doesn't have full reserves, right?

So if everybody who has Barbadian dollars comes to Central Bank and says, I want my US dollars for that, then Barbados is going to run out of US dollars, right? Yeah, but as we just said, they're exchange controls in place. And so if you want to take here, if you want to take your, if you want to convert your barbidus dollars into US dollars you have to you know have a reason why you want to do that so maybe you want to purchase goods overseas and usually there are no once you're doing current account transactions so you're purchasing goods or services it's a relatively easy process to convert barbitish dollars into US dollars yeah capital transactions

because of the risk there say for example if people want to speculate in terms of land acquisitions and so on then you need to provide some good justification for what you want to convert such a large amount of money into US dollars. And then there really isn't a need to hold so much reserves. So it is very unlikely that every single Barbados is going to come to this angel by asking to convert Barbas dollars into US dollars because this is one of the sort of behavioral aspects of economics now. If you were to come to Barbados right now and Barbados is in the midst or we're trying to come out of a recession.

If you were to come to Barbados and offer a Barbadian, say, less than the two-to-one exchange rate, or if you want to sell your one US dollar for three-to-one, Barbadians would not accept that. They would say three to one. I can get two-to-one. Two-to-one is the rate. So there is this fundamental belief in Barbados in Barbados in relation to the ex-1. exchange rate pegged. So once you have that, you know, you've sort of heard the idea of a self-fulfilling prophecy, that doesn't exist in Barbados in relation to the exchange rate. Barbadians all believe that the

exchange rate should be to the one and they would not exchange, except any other rate except to the one. So that sort of scenario is really unlikely. Even in relation to the banking system as well, So the commercial, sorry, the government has been issuing lots of debt over the last couple of years, and there still is a significant demand for Barbados dollar denominated debt by commercial banks and Barbados, because the belief in the Barbados exchange rate and the belief in the Barbados economy. So that sort of scenario is not a possibility. The only reason we raise it in the paper as, sorry, like an academic interest, It is an issue that is maybe sometime in the future.

And as academics, we want to discuss it and flag it as of being a potential issue. Today's magic word is Barbados. That's B-A-R-B-A-B-A-B-A-E-O-S. Head over to Let's TalkBitcoin.com to sign in, enter the magic word, and claim your part of the listener reward. So could you summarize the major? advantages and disadvantages for the central bank of holding Bitcoin? One of the major advantages, again, would be that they could become, in terms of the academic thing Winston was talking about, just though, they could become a bit more able to defend the value

of the currency if there's a speculative attack in our future. That's the first advantage. The other one is that they actually reduce the volatility of their portfolio. of currencies that are currently held. So it's just like any of our portfolios, any of us that invest in stock, any of us that invest in currencies, if you invest in an asset that actually has proven to be less volatile than the average set of currencies that you currently do hold, then yes, your returns might not be as big overall in the future, but you reduce the high likelihood that you will have losses. The next one allows, it helps in terms of the central bank

being able to perform better monetary policy. So because of the whole idea that you can use the metadata on the blockchain to verify transactions, it allows the central bank as well, if a Barbadian decides to want a lot of US dollars, the central bank would know without even using a lot of human resources in the near future. They can almost approve a transaction instantaneously. Likewise, our commercial banking sector should be able to do the same. or our government, as I said earlier, should be able to do the same for smart contracts.

Those are the three biggest advantages for me as far as I'm concerned. Vincent? No, right. So I agree with that as well because one of the key ones that we mentioned was in relation to diversification. And if you are just concentrated in, say, US dollar denominated assets, then you sort of subject yourself to the volatility in, of the changes in the US dollar bilateral exchange rate. So holding another currency allows us to diversify our holdings of international reserves.

There is still a nice small discussion that we had in the paper as well of whether or not you would consider Bitcoin an asset is a fundamental discussion because right now when we hold international reserves, we hold US dollar securities. which is an asset that is internationally accepted and can easily be converted. But there is still a little bit of debate of whether or not the Bitcoin is an asset or simply just a method for allowing transactions to take place.

And in terms of disadvantages? Yeah, so in terms of disadvantages, a lot of it has to do with the readiness of a monetary authority. or monetary authorities globally to want to get into the system. That's the first one. If it isn't a regulator, then it becomes much more harder for small open economies, monetary authority, i.e. the central bank, to actually defend said currency if there is,

again, a speculative attack. I would say in terms of holding the currency now, the costs, and we had mentioned in the paper, if you remember Winston, the whole notion that a central bike could consider itself to be a miner if it's competitively priced to be a minor. And all of us know right now it will be too late in the game for the central bank to mine Bitcoin per se, but not necessarily Ethereum, if the case may be. So if it is that it's competitive, competitive to mine a cryptocurrency, a central bank should consider doing so instead of having to buy off the world market because it might be cheap.

cheaper to produce than to purchase, especially if there's some kind of speculative run against major currencies such as the central bank, such as the US dollar or the euro or the pound or the yen. So a major disadvantage would be if they are holding and mining that they might not be doing so competitively and paying way more for the right to hold a cryptocurrency for the purpose of defending the currency or for the purpose of allowing transactions. seamlessly to pass through barbadas. Yes, the other issue that we mentioned in the paper was the whole volatility.

You know, one of the things with volatility is once there's enough liquidity, volatility is not an issue. But if you are simply buying an asset and holding it for a fairly long period of time, then you then subject yourself to that type of volatility. And we sort of looked at that issue of volatility in the paper. And we mentioned that it could become an issue for central bank. So that's one of issues that we'd also need to consider if you're going to hold Bitcoin as part of international reserves. And that's why it's very important.

The finding from the paper that the central banks should consider holding an insignificant portion to help balance out its portfolio. You know, less than 1%, 1%, but not 10% for certain because then you really subject the value of your international reserves to too much volatility. and too much uncertainty. And therefore, it hinders your mandate to defend our currency. And then it begins to send a signal, a behavioral signal, to Barbadians that Central Bank might not be able to defend said currency. And then the average Barbadian walks around thinking, oh, my, we grew up hearing $2 Barbados to one US. It might no longer be so. And you can have panic if need be, or you can have just general uncertainty and apathy.

It would happen. I mean, for all of my life, 32 years. I was led to believe this thing was two to one. But if I did not study economics, I wouldn't know that it is subjective and it has a lot to do with what a central bank wishes to do, again, to ensure that it's the last, a lender of last resort and therefore protector of the value of our currency. So, what's the status there?

Do you guys see any chance of this happening in Barbados or maybe in some other central banks, across the world. When are we going to see the first central bank run Ethereum mining farm? I wouldn't be a good economist or finance if I wanted to predict a bank, a central bank run or speculative attack. I would however try to encourage central banks to ensure that they are educated enough about these protocols to ensure that they can protect themselves from such speculative runs. Now, let me say this.

The paper itself, and I don't know if Instan remembers this because I made mention, the paper itself would have drawn the interests of the Central Bank of Canada, the Bank of Canada. And I know that as part of their own research, they've been looking at the paper and looking at what our findings were for respect to our small open economies. Because I was knowledgeable for some time that the Bitcoin community has been making arguments that regulators should really see the value. in a decentralized format, a decentralized, sorry, a decentralized and a progressively frictionless format, yeah, or format of currency. So I know some central banks are progressively looking at it, but I don't know which central bank would be the first to declare we are going to hold as a portion of our currency, sorry, our reserves, some digital currency. I think, however, as the paper

would have shown when we did some literature reviews that there are certain commercial banks that began to see the viability of creating their own digital currencies and cryptocurrencies because of the frictionless or relatively frictionless nature of said formats. So a central bank would eventually follow when they realize that it becomes a lot more difficult to defend and protect the value of their own currencies simply because the commercial banks have been able to circumvent them and become a threat to their ability to defend said currency. Yeah.

And remember the central bank in most countries is the government's bank. So once governments around the world start utilizing Bitcoin a bit more in terms of their transactions and Jeremy mentioned a number of potential areas that they can do this in terms of line registry. But say for example, every single month, the... government makes a transfer from its accounts to its employees accounts. Imagine if all of that was done using Bitcoin, the government was saved on bank fees. And then also you have a large number of individuals then would also have Bitcoin that they can

use for expenditure purposes. And if that ever becomes the case, then it then would make the case for the central bank getting involved in Bitcoin a lot stronger because its main customer, which is the government, is then involved in the Bitcoin or cryptocurrency market. So government would also play a fairly important role in identifying whether or not the central banks around the world would move in that direction. And I'm very much encouraging even more yoga developers out there to create more cryptocurrencies because then it lessens the volatility of one cryptocurrency if you can get a wide

basket of all. And the whole point is that the central bank or a central bank would only, only go in if holding that said currency is not highly going to affect the volatility of its portfolio. So the more cryptocurrencies that come to market, less power that a particular minor has over the value of all cryptocurrencies. And therefore, I think then that would be the time that this paper and other research that will find, would have our hold a bit more weight with central bankers. But I would say one other advantage I did not mention. We all know about the swift protocol that banks used to move funds from one bank account held at a particular bank to another one.

Okay. Well, we're at the end of our episode. So thanks so much for coming on, guys. It's really exciting that you guys are definitely thinking a little bit beyond what probably most central bankers are thinking about and right. about it and it's also exciting that you know there's technology startups now in Barbados you know pursuing visions like you know like bit with with this called coin color coin approach so I'm I'm for one part very excited to see what's

gonna come out of these efforts both on the on the practical side but also when it comes to your own research efforts and where they will go next and yeah so thanks so much for coming on, of course, we'll link to... Thanks for inviting this on as well. Yeah, of course, we'll link to your paper and also to... To let us know if there's some other places you want us to link to maybe your university pages where people can find new papers you publish on this topic So yeah, thanks so much guys. Thank you.

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