During his quarterly economic update, InvestorDaily asked Dr Jonathan Kearns for his thoughts on a Deutsche Bank report released in October predicting bitcoin could be added to central bank reserves in the next five years.
Deutsche Bank had highlighted bitcoin’s potential as a reserve asset, noting its similarities to gold make it an increasingly appealing store of value.
“The case for bitcoin as a strategic reserve is strengthening. As bitcoin’s liquidity deepens and regulation matures, bitcoin is emerging as a more legitimised global asset class,” the report stated.
Kearns responded to the forecast with firm conviction - even going as far as to describe the alternative asset as a form of fraud.
“Bitcoin, to my mind, actually makes the definition of a Ponzi scheme,” he said.
“Ponzi is where anyone coming in is only being paid out of those who purchase it later on - that’s the only way you make money out of it. There’s no income that’s generated by that effort.”
He believes bitcoin has no underlying value, and it’s worth solely depends on others being willing to pay for it.
“If people stopped believing others want to hold it, then bitcoin would become worthless overnight,” Kearns said in follow up comments to InvestorDaily.
“It is not a good store of value as it is exceptionally volatile.”
As for what role bitcoin could play in the future of global monetary systems - or digital central bank reserves - Kearns believes there is “no sensible role” for the asset and said traditional financial institutions generally provide services to those seeking exposure to crypto assets (e.g. selling an ETF) rather than taking on exposure themselves.
“Of course, you might find one or two central banks out there, but by and large, central banks are exceptionally cautious about bitcoin - and we’ve seen that in the way that those who are regulators are regulating financial institutions, if they want to hold bitcoin.”
Kearns does believe the underlying blockchain technology can be useful in settlements, as could stable coins.
“But I can’t see how bitcoin or crypto assets ever could be useful in settlements given their properties,” he said.
AMP chief economist Shane Oliver said central banks may still see bitcoin as too speculative and too new an asset - but he did not rule out the possibility of it being added to their reserves one day.
“As it becomes more institutionally accepted, less volatile and proves itself as a store of value then central banks may consider it, but this may take many years — just as it has with institutional investors. But central banks are even more conservative,” he told InvestorDaily.
“Gold is speculative too and yet central banks hold it — but it has a long-term track record as a store of value and is well accepted as such.”
Oliver said that while bitcoin does not generate rents, profits, or dividends - which makes it hard to value - its decentralised scarcity and blockchain security do potentially make it a form of digital gold, provided it becomes more widely seen as such.
“The issue of intrinsic value also applies to gold and yet central banks hold that,” he said. “Like gold, [bitcoin] requires more buyers to come in and buy it to keep pushing its value up.”
Head of business development at Independent Reserve, Lee Eaton, said the "no intrinsic value" argument is often cited because, unlike commodities, bitcoin cannot be used physically and, unlike equities, it isn’t tied to a cashflow.
“However, in a digital context, bitcoin challenges the traditional definition because it possesses the qualities of both scarcity and trust minimisation that have real economic utility,” he said.
“The primary arguments are bitcoin's 21-million hard cap enforces scarcity - independent of human discretion - while bitcoin also provides a globally decentralised, censorship-resistant settlement system that cannot be altered or shut down by any single entity.”
In response to Kearns’ labelling the asset a “Ponzi scheme”, Eaton said the definition of a Ponzi scheme is fraud involving the payment of returns to existing investors from funds contributed by new investors, rather than profits earned by the operator.
“Bitcoin, by contrast, does not promise guaranteed returns, has no issuer, doesn't have an underlying business activity, there is no central operator and it isn't paying 'returns'.
Bitcoin is a decentralised payment and settlement network and the market itself is what determines the price through demand and supply dynamics,” he said.
However, despite rising institutional interest in bitcoin, Eaton believes it would likely take a serious erosion of confidence in traditional reserve assets for central banks to consider holding bitcoin, given their overwhelmingly cautious approach.
“Issues like severe fiscal instability, deeply real-negative yields, or even a broader game-theory between states where, for example, the US, China or other G7 central banks started holding bitcoin forcing other central banks to revisit their position as well,” he said.
Eaton said clarity is required across many areas before bitcoin is viewed as a legitimate reserve or collateral asset.
“In areas such as accounting and valuation standards under regimes like the International Financial Reporting Standards, compliance frameworks under AML/CTF for protocols around acquiring and transferring BTC, and likely issues with existing governance policy on topics like strategic allocation, audit and transparency,” he said.
While it may be unlikely that bitcoin will play a significant role in the global monetary system or become a central bank reserve asset in the very near term, Eaton said the mere fact that serious debate is taking place shows traditionally held views on the topic are being challenged.
“It is plausible that bitcoin may start to play a niche role in the evolution of global monetary systems and digital reserves in the near term through acting as a neutral reserve hedge given its non-sovereign and censorship-resistant properties.”
