Crypto-Backed Fiat Currencies: Sci Fi or Missing Link? Expert Take

Economies learned how to use and abuse the fiat currency system and central banks have not shied away from using the printing press extensively.

Before 1971 central banks had to own large reserves of gold - or the closest proxy, i.e. the US Dollar - as currencies were pegged to a certain quantity of gold.

Ironically, while these central banks own gold as a store of value to defend their currency should their currencies be under attack, most of these central banks do not have access to their own gold.

In the past ten years, central banks have greatly expanded the range of assets they can own way beyond just gold and other fiat currencies.

While it is unlikely that governments will relinquish their fiat currencies and give up the power it gives them, one way through which the cryptocurrency and the fiat currency worlds could intersect would be through the purchase by central banks of cryptocurrencies such as Bitcoin.

A transparent systemWhen one wants to assess the reserves of a central bank, one has to trust what the central bank says their reserves are.

These BTC could subsequently be used to stabilize the currency just like central banks currently do with gold and other fiat currencies.

This central bank's fiat currency would effectively be partially backed by a cryptocurrency.

Each outbound transaction would have to be signed by the governor of the central bank, the minister of finance and potentially an external party such as the Bank of International Settlements of the International Monetary Fund.

Assuming Bitcoin has a one percent chance of being successful at becoming a global currency or a global store of value, it would not be absurd to consider investing one percent of a given central bank's foreign exchange reserves like it was proposed by a prominent banker in Ghana a few months ago.