The World Bank has cautioned that more needs to be done to make crypto assets fit for central bank reserves. In a recent report, the group noted that the crypto-asset market has experienced substantial growth over the past decade, with its scope and market structures evolving at a remarkable pace.
The recent introduction of exchange-traded products in the United States has further amplified interest in crypto-assets, coinciding with a resurgence in their prices. Against this backdrop, institutional investors, including central banks, have been examining the potential of crypto-assets and evaluating the merits of incorporating them into their portfolios.
Despite these advances, crypto assets today fall short of meeting the basic requirements for reserve assets, the group said. ‘Reserve assets are foreign financial assets held by central banks for insurance purposes, to maintain economic and financial stability in times of adverse external shocks and to conduct foreign exchange policy,’ it said.
‘Traditionally, central banks follow a conservative investment approach, focusing on high-quality fixed-income assets denominated in US dollars and euros. As reserves are mostly needed during crises, the primary criteria for reserve assets are liquidity and safety. Less importance is given to return.’
It added that viable reserve assets must demonstrate high liquidity. ‘Major cryptocurrencies like Bitcoin and Ethereum have substantial trading volumes, but volumes are still significantly below that of traditional reserve assets. Furthermore, the overall market depth and the potential for price manipulation continue to pose concerns.’
Regulatory concerns still dominate
Additionally, the liquidity of crypto-assets can be influenced by market sentiment, regulatory news, and technological developments, leading to periods of extreme volatility, it said. Central banks require assets that can be reliably liquidated with limited market impact in times of economic stress, a criterion that crypto-assets cannot yet meet due to their relatively immature market structure.
‘Central banks require legal clarity and regulatory oversight to manage reserve assets effectively,’ it said. ‘The regulatory environment surrounding crypto-assets is still evolving. Many countries have yet to establish clear regulatory frameworks, and existing regulations vary widely. Indeed, the implementation of international guidance and new binding rules is in its early stages and remains inconsistent across countries. Uncertainty in domestic regulation and international regulatory arbitrage poses risks to the acceptability of crypto-assets. The lack of consistent regulatory frameworks can lead to legal and operational risks, making it difficult for central banks to incorporate crypto-assets into their reserve management strategies.’
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