EB121 – Winston Moore & Jeremy Stephen: Barbados, Bitcoin And Central Banking

Transcript

[Music] this episode of epicenter Bitcoin is brought you by high. me protect yourself against hackers and Safeguard your identity online with a first class VPN go to high. me/ Center and sign up for a free account today welcome to Center 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 M Roy today we are joined by Winston and Jeremy who

work at the uh Department of Economics at the University of West Indies uh Winston is the head of department and Jeremy is a lecturer there uh recently they came out with a very interesting paper which um went went through the arguments reasons and models uh supporting and arguing against the idea that whether the Central Bank of Barbados should hold Bitcoin in its portfolio of international reserves we found that this was a very interesting topic because uh central banks holding cryptocurrencies is could be could be a very big idea and this is one of the first papers that um attacks this idea systematically so we'd like to discuss

uh the work and but before that perhaps we should have an introduction from the two of them Winston can we have your introduction sure um Winston Moore as you said earlier from the University of West Indies cville campus I've been a lecturer here for the last um 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 um looking primarily issues again related to private sector development uh finance and environmental and resource issues great and Jeremy your introduction hi yes I'm Jeremy Steven also from the Department of

Economics at the University of the West Indies and I'm a lecturer in banking and finance my interests my research interest 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 uh 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 uh before we start the podcast uh perhaps uh perhaps it's nice if you just describe us the like the monitary landscape of the West

Indies and the Caribbean like what islands are there what kinds of Curr currencies they use this is mainly for listeners and like interviewers like me who have actually never been there so we' just like to know the landscape Lord Winston you go right on at first okay the Caribbean is essentially made up of SM small island developing States and the most of these small island developing States because of the vulnerability that they face so they face vulnerabilities coming from natural disasters hurricanes um storms Earth Quicks and so on um as well as from external shocks so for example International oil prices so because of those vulnerabilities a lot of these

small 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 there really you you cannot end up in a situation where there's very little trading in terms of your exchange um 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 um there's also a sort of overarching issue in relation to um f fiscal issues and debt Finance as well because when you're faced with those um

external challenges it tends to lead to the accumulation of a lot of debt and therefore the there's an there's a significant um relationship between debt accumulation and the monetary developments in the Caribbean as well jerem you want yeah for sure um 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 um Haiti would also have its Haitian Frank but outside of those demestic currencies you the next popular currency would be the US dollar simply because the US a 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 um but for the exception of the Dominican Republic and Cuba they

might have probably some Colombian pesos or or trade they traded 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 um strict trading relationship with the French with well France so so when 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 the 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 a sense is England because of Tourism and Canada to lesser extent because of Tourism we import we are very import dependent country so therefore we to hold more US Dollars than anything else and and for example our Commercial Banking sector on the private sector side that tends to finance more so the import side of the economy so therefore they would hold even probably it'll be skewed even more

towards US Dollars than any other currency that would have made up the basket of currencies that 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 uh significantly they would tend to probably hold as a greater portion of their uh 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 hold 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 all of our neatness 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 uh Sovereign different areas basically um evolving St Vincent Grenada some countries you've heard of before Grenada St Lucia uh Dominica Antigua and Barbuda s kits Anguilla which is uh well OB servant 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 Govern not the governor what what the overarching Eastern Caribbean Central Bank wants to achieve so it's a very complex situation the more I talk about it funny enough I realize how comp 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 Island States but more so um to allow us to be competitive globally in the financial

markets and one thing that 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 barbus is purchasing a product from St Lucia uh we don't tra 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 um reserves of most Caribbean central banks so how does holding so why do central banks hold uh foreign currency reserves and how does that differ in 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 uh than uh for example a country like United States sure uh so there's first the we're holding forign exchange reserves because we have an exchange rate P so the Central Bank of Barb is is written into the Central Bank of Barb is that the central bank would stands ready to exchange two barbus dollars for one US dollar so if you go to the central bank with your uh with your US dollar and you want to convert that to barbus Dollars you'll get two barbus dollars if you go there and you want to purchase one US

dollar you have to hand over um two barbus dollars and that is um Central to what the central bank is doing now I spoke earlier about the issue of vulnerability um Caribbean countries are very vulnerable to external shocks so say for example there is a increase in oil prices um if that occurs the Central Bank needs to have enough um foreign exchange reserves within its um Holdings in order to make sure that we can still Contin continue purchasing the oil that is necessary for our local production so reserves therefore serve as sort of like um 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 is it's sort like your savings that you have um as an individual then the Central Bank also holds those reserves as a means of um smoothing out fluctuations so as a small open economy a lot of our transactions are are based on purchasing imports from outside of the country which then go into domestic production uh in order to purchase those uh those Imports we need to have forign currency to purchase imports from US Canada even other Caribbean countries uh and we don't want a situation occurring where a company and Barbers wants to

purchase a good and there is not enough um foreign currency to make or to complete that transaction so to prevent those sort of issues occurring we need to hold of international reserves of various currencies to complete those transactions now if you contrast that with a country such as the United States United States dollar is an international Reserve currency so that individuals outside of the United States still stand ready to accept the US dollar for the settlement of transactions there's no way that someone outside of barbas would accept the barbas doar to settle International

transaction 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 been 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 um really using monetary policy protect so what we do really not just to replicate their reasons because again there's a huge demand for their currencies the Euros the pounds even the South African um currencies even Brazil's real pesos there's way more demand for those we are not as Wiston said just now 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 Dollars EAS easily

and if need be then we could have a 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 you see so it's a very interesting Dynamic some islands in the Caribbean because we spoke to barbus 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 um regime just like what you you get in Europe States and the reason they can do so is because they are 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 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 high. me look when you're choosing a VPN provider you want to make sure that your privacy is protected you know if a government agency tries to force the VPN provider to hand over some of your traffic or B or or browsing information will they be able to do that

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use as much as you want you can connect up to five devices so your whole household fits on the 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 kto me for their support of eps and Bitcoin let's zoom in into into Barbados because your your paper U deals with Barbados um can you give us an idea of the like order of magnitude of uh reserves the Central Bank holds like you know is it like how much is it roughly and what what happens uh if in a crisis uh these reserves are depleted what

happens then okay so I will answer your last question first so okay remember the central bank has to stand ready to exchange $1 US dollar for $2 Us doll so if there are no reserves the Central Bank cannot fulfill that mandate and therefore the peg will um basically disappear there's no way that we can maintain the exchange rate Peg of two barbus dollars to1 US doll because the Central Bank cannot defend that Peg there's nothing to maintain it so you would then revert back to a freely floating exchange rate regime that Jeremy would have mentioned earlier so the central bank and barbes in order to

avoid that occurring has uh a sort of rule that they tend to follow and it is based on Thea Imports that um come into the country on the 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 uh if Suppose there is zero um flows of foreign exchange for 12E period we will still have enough foreign exchange to purchase all of our Imports over that 12E period That's all is suggesting um at the moment our Reserve cover is around 17 weeks uh which provides us u 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 um 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 uh a year or two ago I did a paper looking at this issue of uh 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 Peg so 12 weeks what does that correspond to or 17 weeks in terms of GDP how many percent is that we that's not a statistic that we normally um calculate but the I guess you can do a rough mental calculation barbus say's GDP is around 8 billion billion Bon doll 4 billion four billion US they boats exactly and the reserves are just over a billion

so like 1/8 of that is is going is held in international reserves so as a percentage of GDP then it would be you said a billion so one if just around 200 million Barbados dollars out of 8 billion so just less than 10% say less than five say about 2.5 3.5% GDP thereabouts just roughly the reason why we really don't look at it in terms of GDP is because um you're generating reserves using uh from your economic activity but you're also consuming um reserves um as you import more goods and services so

the the usual bankart is to put your International reserves as a ratio to Imports of goods and 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 uh 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 stop coming for like 3 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 uh it can still kind of drain that battery and import things that the Citizens need that that may be oil it might be some kind of uh construction material or whatever and so 12 weeks might mean that in that situation um the Imports can go on for 12 weeks and after

that should should uh should uh a situation occur where the the reserves are completely drained then uh the the island cannot import anything anymore basically and the prices of everything shoots up on the on the market inside the country well probably more so is 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 uh let's talk a little bit about uh cryptocurrencies in

in Bitcoin and how that comes in here so yeah yeah just from a from a I guess very taking a step back how do you guys as as people involved in Central Banking think about something like Bitcoin well I am very Pro Bitcoin thankfully I left Central Bank in a a long while ago Winston just before me but he was in it for a little bit longer and possibly tainted but uh I I'm very Pro cryptocurrency not necessarily Bitcoin cuz now you've got the 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 helps

a small country with the issue of velocity why what I mean is the in small Caribbean countries we have a very bad culture when it comes to e-commerce it's most commercial banks are very very anti- e-commerce they see it as being costly there's not enough of a population per country I mean if you there's only two Engish speaking Caribbean countries that have more than 1 million people Jamaica and Trinidad and Tobago so they they're very anti e-commerce solutions for domestic markets and the issue has been that most people would have found a need to go into PayPal and have their their um 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 allows businesses to set up very cheaply in barbad as the example would be of bit and provide to the Barbadian business person small business person or even larger companies at access to their own customers domestically it also helps with the whole phasing out of cash which is expensive for 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 to 1 cent so it's becoming more costly for central banks to produce money even actual physical cash uh 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 Pap uh 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 for instance 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 pring issue in in Barbados and in fact I wish to study it a bit more in the U near future with respect to the entire Caribbean wiinston your thoughts yeah um my thoughts in relation to to bitcoin and one of the things that we mentioned in the paper was the whole idea of diversification so we spoke a lot about um the Central Bank holding International reserves earlier and the Central Bank holds those reserves in various currencies it holds it you'll have Holdings of US Dollars um it'll be denominated sorry in US dollars

denominated in in the pound and those type of things but you know when the US Dollar exchange rate changes relative to the pound or relative to the euro then our reserves are affected yeah so by holding another currency it sort of provides us um opportunity to diversify all Holdings of um of Foreign Exchange Reserve so that we're no longer holding just US Dollars and therefore subject to the volatility in 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 the study it the the level of volatility that we saw in in Bitcoin wasn't that sign different from what we observe in other um currencies so it it does seem to have some potential benefit there we crunch the numbers in the paper and reported the results the other thing the other benefit that we can also mention that can come about as well and this one is this an area that has not occurred as yet but it is something that we mentioned in the paper and that's this is the idea of of a speculative attack um so one of the reasons for holding um your reserves is that you want to defend

your exchange rate Peg so that we can always say that whenever you're ready you can come to the central bank and exchange your two barbus dollars for $1 us um holding reserves in in Bitcoin allows us another um angle to say protect against such an attack because someone can say for example um through their Bitcoin wallet they could bet against the U devaluation of the barbus dollar there's no way for the Central Bank of barbas to U 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 Barb dollar using US dollars they would um 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 uh against the bar Gage as dollar now that is something looking very far into the future because that isn't anything that is really um sorry I just want to mention this as soon as I say that because there's not anything that is um even very a remote possibility it is a very is not a very major issue to

look at um as yet uh because you first we have War change controls in Barbados so you first have to be able to um purchase barbus dollars in order to do that and you need to get those barbas dollars then converted into Bitcoin and with our forign 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 barbas 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 uh in the future actually is is even more of an issue now because of the

color the colored um 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 barbaran dollars into Bitcoin let's just do uh just very briefly can you talk um give a few sentences about what pit is and and what they're doing and how that relates here oh yes so it's the first Caribbean well the first digital asset Exchange in the Caribbean uh I think they're way more than a crypto currency exchange so it's a digital asset exchange founded here in Barb SP two Barbadian entrepreneurs Gabriela bed who

seems to be rather popular in the Bitcoin community and his Finance guy Oliver Gil so I'm also as a matter of disclos a consultant to bit and very early in their life they would have been Consulting me on different regulatory issues and also looking an 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 uh let's say a broker if I can call it that or an exchange I should say to have the a large amount of convertible Barbados dollars into

Bitcoin and Bitcoin into us they're not going to have as much as a s bank can so in that respect the Central Bank isn't under any immediate speculative threats but for argument 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 sake if they're able to convert up to 10 billion US at on demand in Barbarian dollars then somebody through bit could actually become a threat what that calls for then is that and a bit I I'm glad they've been very open they have kyc they have an infrastructure that allows Regulators if

they ever wish to to be able to look into jery Define Jeremy Define kyc sorry know your knowing your customer an anti-money laundering term knowing your customer so it's very open and what that has done at least and Gabrielle could easily defend it is that it allows any regulator if they are feeling a possible threat to be able to supervise not necessarily supervise sorry to see what bit is doing but as it stands vinston is correct in the near term there could 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 be

coming even more aware that these things can be possible because money as 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 any body 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 would do it cool those are those are very very interesting scenarios like you know uh perhaps in my mind it's like Bitcoin is too small to today you know uh you know launching speculative attacks off Bitcoin might be difficult but yeah maybe one day when it's big uh I think

uh these kinds of scenarios could definitely occur not not just Bitcoin may remember it's any cryptocurrency these guys are just um these exchanges are built into several blockchains so the problem is the cumulative effect of all currencies the paper for 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 Litecoin 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 that we referenced in our study that suggests that the IM monetary fund should actually consider holding some type of cryptocurrency in their reserves as well so it's issue that has been discussed in in the academic literature as well right but so just a little bit more on this I I don't understand what exactly you mean here so how would this speculative attack using cryptocurrency or blockchain backed assets or something how how would that practically work okay so Winston mentioned before that we have we have foreign exchange controls the way a foreign exchange control works

cuz it is not is not widely practiced globally Greece to a less extent and yeah Greece is probably the most prominent example of what current 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 let all of my money sent out in US Dollars therefore the demand for US dollars if I'm a

multi-millionaire in a small country 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 speculate an attack on my own currency now I'm not doing it for gain but remember if it were that I wanted to buy barban dollars cheap and and sell them and sell US dollars expensively for a profit I could do the same thing except the intention would be different so what I do I go and if I get get permission the 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 of that money overseas right now we 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 that 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 amount of Barbados dollars on me right now I can write you a check for $10 million which I 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 think could do is I go out to bit I give 10 million us bit can send that money um via Bitcoin overseas and in their overseas accounts 10 million well 5 million US 10 million Barbarian here so 5 million us then is uh 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 rise now it can happen the US

dollar raises in value so it can happen from another way around where somebody decides through Bitcoin they 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 sometime 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 unstabled 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 um versus

anywhere else so then it could be the case where to that for argument sake our commercial Banks decide to go through if it's unregulated they can decide to go through bit if they want to get access to easy US dollar overseas and therefore then it becomes much more difficult for the central bank to defend the currency whil they aren't able to give permission for that for for US dollars to be in circulation yeah yeah yeah perhaps I I could I could I could describe this a bit differently okay go so um so so so the so basically the interesting scenario is when um you have companies like bit or maybe the future one ones

that start to issue barban Barbarian 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 ex exchange barban dollars for Bitcoin and the other way around and and maybe even in the future it becomes easy to short sell barban dollars just using the Bitcoin blockchain so for our listeners that that that haven't heard of Short Selling it's basically I I borrow some asset like a barbarian dollar and I sell it on the market and I and the person from whom I borrowed I promise to repay barban dollars let's say 3 months down the line now now maybe like short

selling the Barbarian Dollar on the Bitcoin blockchain might be a possibility that opens up you know in in 2 or 3 years if if with the colored coin protocol Etc 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 Barbarian dollars this ability they don't have today because uh 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 barbon dollars on the Bitcoin blockchain and that in effect becomes a speculative attack against the currency of Barbados right that that is

a very good explanation yeah it's basically the same thing thing yeah yeah and and just uh one more thing right the reason why this is a threat is because uh Barbados doesn't hold you doesn't have full reserves right so it if everybody who has Barbadian dollars comes to you comes to Central Bank and says I want my US dollars for that then uh barbad is going to run out of US dollars right yeah but um as we just said there there are exchange controls in place and so the if you want to take your um if you want to convert your

barbus dollars into US dollars you have to you know have a reason why you want to do that um so maybe you would want to purchase Goods overseas and usually there are no once you're doing current account transactions so you're purchasing goods or services is a relatively easy process to convert bar with dolls us yeah um Capital transactions because of the risk there say for example if people want to speculate in terms of land um Acquisitions and so on then you need to provide some good justification for why you want to convert such a large amount of money into US dollars um and then there really isn't a need to hold so much reserves so um it is very unlikely that uh every single Barbadian is going

to come to the central by asking to convert um barbad dollars into US dollars because this is one of the sort of Behavioral aspects of Economics now if you were to come to Barbados um right now and barbus is in the mid or we're trying to come out of a recession if you were to come to barbus and offer a Barbadian um say less than the 2:1 exchange rate or if you you want to sell your $1 US dollar for three to one um barbadians will not accept that would say 3: one I can get 2: one 2: one is the rate so there is uh this fundamental belief in Barbados in relation to the exchange

rate Peg so once you have that that you know you've sort of heard the idea of a self um fulfilling prophecy um that doesn't exist in barbas in relation to exchange rate barbadians all believe that the exchange rate should be to the one and they would not exch accept any other rate set to to one so that sort of scenarios is really unlikely even in relation to the um the banking system as well um so the C the commercial but sorry the government has been issuing lots of Deb over the last couple years and there still is a significant demand for Barbados dollar denominated debt by commercial Banks and barbad because the

the belief in the barbes exchange rate and the belief in the barbes economy so that sort of scenario is not a possibility the only reason we rais it in the paper as sorry like the 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 a being a potential issue today's magic word is Barbados that's b a r b a d o s head over to Let's bitcoin.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 bston was talking about just now 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 uh 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 you can use the metadata on the blockchain to verify transactions it allows the central bank as well if a barbarian 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 Winston no right so I agree with that as well because the one of the key ones that we mentioned was in relation to diversification um and if you are just concentrated in say US dollar denominated assets then you sort of subject yourself to the volatility in terms of the changes in the US dollar bilateral exchange rate so holding another currency um allows us to diversify our Holdings of international um reserves there 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 uh is is fun is a fundamental discussion because um right now when we hold International reserves we hold um US dollar Securities uh which is which is an asset that is internationally accepted and can easily be converted um but there there is still a little bit of debate of whether or not the Bitcoin is an asset or simply just um uh a method for allowing transactions to take place and in terms of dis disadvantages yeah so in terms of disadvantages a lot of it has to do with

what the Readiness of a com of a monetary Authority or monetary authorities globally to want to get into the system so that's the first one that it if it isn't a regulator then it becomes much more harder for a 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 cost I I we had mentioned in the paper if you remember Winston the whole notion that a central bank could consider itself to be a minor if it if it's competitively priced to be a minor and all of us know right now

it'll be too late in the game for the central bank to mine Bitcoin per se but not necessarily ethereum if if the case may be so if it is that it's competitive competitive to um mine a cryptocurrency a central bank should consider doing so instead of having to buy off of the World Market because it might be cheaper to produce than to purchase especially if there's some kind of speculative run against major currencies such as the Central Bank sorry 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 Barbados yes the other issue that we mentioned in the paper was the whole uh volatility uh you know one of the things with volatility is once there's enough liquidity uh volatility is not an issue but if you are simply buying an ass um an asset and holding it for a fairly long period of time then you then subject yourself to that um type of volatility and we we sort of looked at that issue of volatility in the paper and we mentioned that could become issue uh for uh Central Bank so that's one

issues that we'd also need to consider if you're going to hold uh Bitcoin as part of international reserves and that's why it's very important the the finding from the people that the Central Bank 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 uh the value of your International reserves to two 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 the 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 I was led to believe this thing was 2: one but if I didn't 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 Al lender of Last Resort and therefore protector of the value of our currency so what's the what's the status there do you guys see any chance of this happening in Barbados or in maybe in some other Central Banks across the world when are we going to see the First

Central Bank Run ethereum mining Farm all right well I wouldn't be a good Economist or financially if we wanted to predict a bank a central bank run or speculative attack I I would however try to encourage central banks to ensure that they are educated enough about these protocols in to ensure that they can protect themselves from such speculative runs now now let me say this the paper itself and I don't know if in remembers this cuz I made mention the paper itself would have drawn the interest 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 with 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 decentralized format uh a def 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 will be the first to declare we are going to hold as a portion of our currency um sorry our reserves some digital currency I think however as the paper would have shown we when we did some literature reviews

that the there are certain commercial banks that begun to see the viability of creating their own digital currencies and cryptocurrencies because of the frictionless or relatively frictionless nature of said um 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 circum vent um circumvent them and and become a threat to their ability to defend said currency yeah and remember the Central Bank in most countries is the government's um bank so once the um once governments around the world start um

utilizing Bitcoin a bit more in terms of their transactions and Jeremy mentioned a number of potential areas that they can um do this in terms of line registry but say for example every single month the government makes a trans transfer from its accounts to um its employees accounts uh imagine if all of that was done using Bitcoin the government was save on um Bank fees and then also you have a large number of individuals then all would also um 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 um getting involved in Bitcoin a lot

stronger because its main customer which is the government is then involved in um in the Bitcoin or cryptocurrency uh market so government would also play a fairly important role in in identifying whether or not your central banks around the world would move um in that direction and I'm very much encouraging even more younger developers out there to create more cryptocurrencies because then it lessens the volatility of one cryptocurrency if you can get a white basket of all and 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 follow 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 use to move funds from One bank account held at a particular Bank to another one yeah okay well we're at the end of our episode so thanks so much for for coming on guys it's it's really exciting that you guys are definitely thinking a little bit beyond what probably most Central

Bankers are thinking about and writing 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 uh color coin approach so I'm I'm I'm for one part very excited to see what's going to come out of these efforts uh both on the on the Practical side but also when it comes to your own research efforts and where they will go next um and yeah so thanks so much uh for coming on of course we'll we'll link to thanks for inviting us on as well yeah of course we'll we'll link to to your paper and also to um to let us know if there's some other places you want us

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 thanks for listen listeners uh for listening as every week so you're part of the let's talk Bitcoin Network you can find lots of great shows on let's talk bitcoin.com about different topics and um yeah if you want to listen to the show you can do so using any podcast app out there or you can watch videos to on youtube.com/ Center BTC and if you if you want to you can also leave us a iTunes review or a review on some other service and if you do that just send us an email at show at enter bitcoin.com and we will send you a t-shirt you send

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