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Central bankers see a limited role for crypto in reserve operations

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Central bankers are skeptical that bitcoin and other cryptocurrencies will replace gold as a safe haven of value, but are optimistic about the prospects of official digital tokens as authorities tackle how to respond to the cryptocurrency boom.

Nearly 85 percent of reserve managers say they don’t expect cryptocurrencies to replace the precious metal in their foreign exchange reserves, according to an annual UBS survey of 30 major central banks.

More than a quarter of respondents said that bitcoin and its peers had investment potential as unrelated assets that do not move in tandem with other markets, but 57 percent of officials said they they did not expect cryptocurrencies to have a significant impact on their reserve operations, according to UBS.

The cautious sentiment among central bank officials comes as the cryptocurrency industry has boomed in recent years, and has encouraged official institutions to consider more seriously how to regulate these assets and to what extent they should play a role in and its operations.

Many proponents of cryptocurrencies see digital tokens as a way to preserve the value of their savings at a time when the world’s central banks have launched maximum stimulus programs to fight the pandemic, which has raised fears of a period of higher inflation.

However, the intense volatility of many currencies has kept large segments of major investors away from the asset class and has eroded its appeal as a stable store of value, according to investors and analysts.

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While central bank officials have doubts about private cryptocurrencies, they are growing more confident about the prospect of official currencies, or central bank digital currencies.

About 60 percent of central bank reserve managers interviewed by UBS said they expected at least one G7 central bank to make digital currencies directly available to consumers in the next half decade. More than 80 percent said they expected the “wholesale” central bank coins, which will be made available to large financial institutions, to be launched over the period.

Officials said two of the main motivations for the central bank’s digital currency search were to improve the retail payment system and upgrade the wider financial infrastructure, including key functions such as clearing and settlement. They also said that these central bank coins could help reduce crime and money laundering, according to UBS.

China is one of the world’s leaders in tokens backed by the central bank, with its digital yuan already in a testing phase at a time when key central banks elsewhere are only exploring similar projects.

In traditional financial markets, reserve managers have marked high levels of debt in the global economy as a key risk as well as a failure to end the pandemic. The study also highlighted the continued growth of the share of Chinese renminbi in reserves, which Massimiliano Castelli, one of the authors of the UBS report, said could touch up to 15 percent of holdings in the next decade.


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