Czech National Bank (CNB) governor Ales Michl suggested last week that his central bank could hold up to 5% of its €140bn-equivalent reserves in Bitcoin, which would make it the first Western central bank to hold crypto.
Thankfully, ECB president Christine Lagarde swiftly poured cold water on the idea in Thursday’s post-rate cut press conference, stating she was “confident that bitcoin will not enter the reserves of any of the central banks of the General Council”.
However, the CNB seems still intent on diversifying its reserve portfolio and put out a statement that same day saying it will “analyse the options for investing in additional asset classes”, without explicitly naming crypto or bitcoin.
Across the Atlantic, US president Donald Trump has introduced a raft of executive orders promoting crypto markets in the US.
On Tuesday evening, David Sacks, venture capitalist and chair of the President's Council of Advisors on Science and Technology, announced the formation of a working group to examine “the feasibility of a Bitcoin Reserve”. This reserve will be separate from the US Sovereign Wealth Fund, formed by Trump on Monday.
BREAKING: 🇺🇸 President Trump's Crypto Czar David Sacks says they're going to evaluate a Bitcoin Reserve. pic.twitter.com/cbQYwcONQC
— Bitcoin Magazine (@BitcoinMagazine) February 4, 2025
At a state level, two states have already divested pension funds into crypto exchange traded funds — Wisconsin and Michigan — with 16 other states actively pursuing crypto stockpiles or investing state pension funds in crypto assets.
Crypto casino
However, crypto is about as predictable as president Trump himself.
The market is a casino packed full of wild swings and the twin prospects of great losses and massive returns. Richard Branson once said “if you want to be a millionaire, start with a billion dollars and launch a new airline” — these days it might just prove easier (and quicker) to get involved in crypto.
As Lagarde said when asked about Bitcoin reserves last Thursday, the purpose of central bank reserves is to be “liquid”, “secure”, “safe” and “not be plagued by the suspicion of money laundering or other criminal activities”.
Unfortunately for crypto aficionados, cryptocurrency does not boast these qualities.
The mass falls in crypto prices earlier this week in the wake of Trump’s new tariffs on Canada, China and Mexico wiped out almost half a trillion dollars in less than a day. As of Tuesday evening, Bitcoin had fallen 3.1% over the last seven days, Ethereum 12.62% — despite an Eric Trump endorsement — and Dogecoin, a favourite of Elon Musk, was down 19.25%, according to Coinmarketcap.
Sure, the cynics could argue that the sharp fall in crypto valuations does — to an extent — prove the market is somewhat liquid as investors could swift exited their positions, albeit at a loss. But it is clear that it is not a safe or secure asset worthy of backing up reserves or a sovereign wealth fund in the same way more conservative assets like govvies, gold or even equities do.
Moreover, cryptocurrency markets are an unregulated Wild West, a Hindenburg ready to go up in flames at any moment. Central banks and governments should not wade into these markets and buy blindly without regulation — especially when taxpayer money might be on the line.
Of course, regulators are taking steps to try and regulate these markets. The EU, for instance, has had some form of regulation under the Markets in Crypto-Assets (MiCA) act since December 30 last year. In the US, Trump’s January 25 crypto executive order put in motion plans for a federal regulatory framework for crypto assets.
But the beauty of cryptocurrencies — at least in the eyes of the Bitcoin holder — lies in its inability to be wholly regulated by government bodies. In fact, the prefix itself comes from the Ancient Greek krŭptós, meaning secret or hidden.
Not so stable coins
Of course, a distinction needs to be made between the memecoins beloved by crypto zealots like ‘special government employee’ Elon Musk, and the central bank digital currencies (CBDCs) being explored around the globe.
According to the Atlantic Council’s CBDC tracker, 134 countries and currency unions are currently exploring CBDCs, up from 35 in May 2020. However, to date only three countries — the Bahamas, Jamaica and Nigeria — have launched a CBDC.
Unlike memecoins, or even mainstream cryptocurrencies like Bitcoin, CBDCs are issued by a central bank and merely a digital counterpart to fiat money. In theory, CBDC should combine the best of fiat money with modern digital technology — they are fungible, trackable and expected to speed up payments, transfers and settlements to real time.
But not everyone is a fan. One of Trump’s first acts in office was to sign an executive order forbidding US government agencies “from undertaking any action to establish, issue, or promote central bank digital currencies”.
Instead, the US government’s focus is on the private stablecoin market. Stablecoins are crypto assets designed to allow investors to switch between coins with ease while never leaving confines of the crypto market. Unlike traditional cryptocurrencies, like Bitcoin, stablecoins are pegged 1:1 to another asset, in most cases the dollar.
US senator Bill Hagerty said on Tuesday that he will introduce the Guiding and Establishing National Innovation for US Stablecoins — GENIUS — Act, which he hopes will provide a regulatory framework for stablecoins.
Today, I’m introducing the GENIUS Act w/ @SenatorTimScott, @SenGillibrand, & @SenLummis, a bill that establishes a clear regulatory framework for stablecoins. I look forward to working with @RepFrenchHill and @FinancialCmte to get it to the President’s desk and signed into law. https://t.co/8dz0HnYrLG
— Senator Bill Hagerty (@SenatorHagerty) February 4, 2025
But stablecoins are not always stable, as the market found out when the algorithmically backed Terra lost its peg in 2022, resulting in a $45bn loss in under a week.
Meanwhile, rating agency Fitch meanwhile warned in 2021 that the growth of the stablecoin market and its heavy reliance on commercial paper and short-term US Treasuries could impact short term securities during times of crypto market distress.
Eight Nobel Laureates for Economics and countless former central bank officials have decried the cryptocurrency market as a bubble, albeit one that has burst and expanded already on several occasions.
Cryptocurrencies have proven themselves volatile and 'vibes' driven — just the mere mention of an asset can drive the price upwards or spiralling downwards (Elon Musk's stint hosting Saturday Night Live cratered Dogecoin's value in only a few hours).
Central banks might pride themselves in being able to calculate the movement of rates, but they cannot always calculate the madness of men. Crypto is an unpredictable market at the best of times — and one best avoided when the taxpayer is unwillingly on the hook.