Cryptos, EMTs, Bitcoin and Other Girls on the Heap
- AAmstg
- Feb 21
- 11 min read
Updated: Jun 9
Some Notes on Strategic Reserves and Money Masses
... It will be due to hunger or desire to eat, it will be out of necessity, or it will be out of virtue; it will be because the money-debt barely has room to manoeuvre in an ocean of Bonds without the seams to the central banks or it will be because there are digital assets that want to be money instead of money; the truth is that there are those who have the support of the Central Banks and there are those who do not yet have it. In addition, bitcoin has become a place under the sun and under the stars as well because it is listed on the market at a 24 / 7 regime, and bitcoin ETF emissions seriously impact its volatility, so the big ones are also climbing on the shore to the impulse of this undoubted incentive...
Six ideas I wrote down after publishing my talks on what happened to Bitcoin since El Salvador left it somewhat in its own way out from the national system of compulsory means of payment:
1) 'Legal money' and 'bank money' are distributed in different monetary or quasi-monetary masses (M0, M1, M2, M3 and M4) as determined by Basel (International Bank of Payments).
2) If 'cryptos' and 'bitcoin' are not 'money' ('currency'), they cannot be part of any such 'Masses'; therefore, they cannot be attached to the Balance Sheet of any Central Bank as 'money'. This is pure taxonomy; it cannot be shored.
3) This does not prevent there from being (some) Central Banks that have acquired or incorporated, punctually or testimonially, to their Balance Sheets all or some of these digital assets: cryptoassets, cryptocurrencies, and bitcoin. Even if it were to analyse the aetiology and performance in managing these digital assets with which they would have to relate.
4) Cryptocurrencies (we will dispense with other crypto assets for these purposes) can be issued by a Central Bank (and then they are called the acronym CBDCs) or not, which is a type of crypto that would be called to represent the position of the digital asset money issued by the Central Bank.
5) There is a type of crypto asset subject to the EU MICA: e-money tokens (EMTs), which are called for being 'money'.
Finally,
6) Bitcoin, as a 'tertius genus,' differs from 'money' (or 'currency'), 'cryptocurrency', and 'CBDCs', which are clearly not issued by a central bank or a private entity but by a decentralised autonomous system.
This fascinating subject raises several complex questions from both a theoretical and practical point of view. How could crypto assets or Bitcoin be integrated into central banks' (BC) balance sheets or global monetary systems? What would happen if they were part of a strategic reserve system like the one proposed by Mr. Trump's Administration?
I advance my opinion: a normative and regulatory paradigm change will be necessary. Crypto assets today do not fulfil the traditional functions of "money". Still, they could enter the equation through CBDCs, e-money tokens (EMTs) and a regulatory system that allows their value and stability to be recognised as part of international reserves. However, all this is conditioned on a development in global monetary policy, which allows new definitions of " money " and a more flexible framework for digital assets.
Three ideas for the initial framework:
What is money, and what forms does it take?
Money is the widely accepted instrument in society to facilitate economic transactions for which it will have to fulfil three main functions: 1ª) Be a means of exchange, facilitating the purchase and sale of goods and services without the need for barter; that is, without the need for the concurrence of the double and reciprocal solution of needs between the contracting parties. 2ª) Be an accounting unit, serving as a measure of value to compare the price of goods and services. 3ª) Be a reserve of value, allowing the storage of wealth not left for future use. The key expression within this definition is "widely accepted".
Money can take two different forms, which are joined by a third and, more recently, a fourth that is postulated to be incorporated into the concept of money. All current forms of money correspond, by their source of value, to what is known as money debt; that is, they emerged from the previous issuance of public debt by the States, which have the right to issue money under monopoly.
The forms of money are: 1ª) Legal money: Coins and banknotes issued by a Central Bank (for example, euros or dollars). 2ª) Bank money: Deposits in bank accounts that can be converted into legal money. 3ª) Electronic money: Digital value representations, such as balances on prepaid cards or electronic wallets. 4ª) Cryptocurrencies: They are not yet money but digital assets not issued by central banks but by private entities with the expectation that they will be used as a means of exchange in an official and normally centralised manner. They would be joined by bitcoin, issued decentralised and which will be recognised in El Salvador, from April 1º, 2025, only as a means of solving the exchange of debts between individuals.
What are the Monetary Masses, and what classes are there?
Monetary masses are aggregates that measure the amount of money circulating in an economy. They are classified into different categories (M0, M1, M2, M3, M4) according to their liquidity and proximity to physical money. The International Settlement Bank (ISB) defines these categories, which central banks use to manage monetary policy.
Classification of Monetary Masses
1. M0, the Monetary Base, includes the legal money in circulation (banknotes and coins) plus the reserves of commercial banks in the Central Bank. It is the most liquid and narrow measure of the money supply.
2. M1 includes the M0 plus demand deposits (current accounts) and other liquid assets that can be quickly converted into cash. It represents the money available for immediate transactions.
3. M2 includes the M1 plus savings deposits and short-term deposits (up to two years). It is a broader measure that includes slightly less liquid assets.
4. M3 includes M2 plus longer-term financial instruments, such as money market funds and negotiable securities in that market. It is the broadest measure of the money supply, but some States distinguish another Mass:
5. M4 (thus, in the United Kingdom), which includes M3 plus other liquid assets, such as Treasury bills or short-term bonds. It is not universally used, but in some financial systems, it is used to measure total liquidity.
What is the relationship between money and monetary masses?
- Legal money (banknotes and coins) is part of M0 and M1.
- Bank money (deposits) is included in M1, M2 and M3, depending on their liquidity.
Cryptocurrencies are not part of the traditional money supply because they are not issued by a central bank or universally recognised as money. However, if a central bank decides to include crypto assets in its reserves, they could be considered part of a new category of strategic assets.
Money is a fundamental concept in society, the economy, the law and the markets, while the moneylies are tools to measure circulation and liquidity. What corresponds to The emergence and evolution of cryptocurrencies and other digital assets (bitcoin) is challenging the traditional definitions of money, and it remains to be seen if such redefinitions will make sense to solve the problems generated by the current state of affairs arising from the money-debt.
1. The Context of Strategic Reserves of Crypto Assets and Bitcoin
It should be emphasised that the idea of a strategic reserve of crypto assets or Bitcoin in the balance sheets of the Central Banks (CB) is not established within traditional monetary regulations, so it is an innovation in global financial policy. Having said that, we see it step by step:
A) What is a Strategic Reserve?
A strategic reserve is a fund or set of assets a government or institution holds to protect or stabilise a currency or economy in times of crisis. In the context of cryptocurrencies and the USD, a strategic reserve could include a combination of US dollars and crypto assets to diversify risks and provide liquidity in situations of extreme volatility.
B) What would 'bitcoin' be in this context?
Bitcoin is not "money" in the conventional sense since it is not issued or backed by a Central Bank, nor does any financial authority regulate it in the classic sense. Instead, it is a decentralised digital asset with limited supply. This makes it a "tertius genus": neither money nor a classic financial asset, but an asset that can play a significant role in investment reserves or portfolios.
Unlike traditional currencies or bank money, which are subject to Central Bank monetary regulations (such as M0, M1, M2, etc. systems), Bitcoin is part of a decentralised autonomous system. However, it is important to note that Bitcoin and the most conventional crypto assets can play a role as a store of value and strategic assets in country portfolios or even Central Banks, depending on their approach to technology. This strategic quality can also be preached from other assets; gold, oil or gas fields, mineral deposits or water reserves.C) What about e-money tokens and their relationship with the EU MICA?
E-money tokens (EMTs) are a category defined under the EU's MICA (Markets in Crypto Assets) Regulation and classified within crypto assets. Although EMTs are considered digital money and are said to be or will be designed to maintain a stable value (which is certainly - and for now - just a wish, they are not "money" in the traditional sense of the word either (that is, they are not directly backed by the Central Banks). However, it would be possible that they could represent fiat money (fiat), such as a dollar or euro. Still, issued by private entities under the regulatory framework, it would have to pass at least two things: integrate into the said regulatory framework, and Basel incorporate such assets into one of the money supplies that segment the balances of central (and commercial) banks.
In a nutshell: How do we integrate EMTs into any of the Basel Monetary Masses?
1. Recognition as Electronic Money: EMTs must be recognised as electronic money, allowing their inclusion in the M1 money supply (money in circulation and demand deposits).
2. Supervision and Regulation: Under MICA, EMTs would be subject to rigorous supervision, ensuring their stability and consumer protection. This would facilitate its acceptance and widespread use.
3. Interoperability: EMTs must be interoperable with other payment systems and electronic currencies, allowing seamless integration into the existing financial system.
4. Strategic Reservations: This would be an adequate end of the journey in this incorporation of money. EMTs could be part of the strategic buffers of EU central banks, providing an additional tool for monetary policy management and financial stability.
2. How can crypto assets and bitcoin be integrated into the balance sheets of Central Banks?
The central theme is how assets can be part of a Central Bank's strategic reserves. This could happen through one of the following paths, although none is simple or direct in terms of current integration:
A) Recognition as part of international reserves:
For one of these assets (including Bitcoin) to be integrated into the balance sheets of a Central Bank as part of its international reserves, it would have to be recognised by central banks as an asset that fulfils the functions of a reserve: stability, value, and liquidity. This would be a paradigm shift in how reserves are made up today (mainly precious metals and traditional currencies). In the hypothesis of Bitcoin, it could be considered a store of value. However, one of the suggestions offered is not a currency due to its scarcity and established demand, especially if it remains within a basket of crypto assets with other more stable assets.
B) Access to the function of "supporting" the issuance of money or debt:
Central Banks can support the issuance of debt or fiat money with assets, traditionally gold or foreign currencies. However, crypto assets, particularly Bitcoin, are not considered liquid or stable enough to support a central bank's issuance of fiat currencies directly. This double condition, liquidity and stability, opposes the allocation of the role of money (we saw it in the case of El Salvador).
C) Creation of CBDCs (Central Bank Digital Currencies):
Although Bitcoin is not issued by a Central Bank, a CBDC (Central Bank Digital Currency) would be. In fact, CBDCs are designed as digital currencies issued and backed by central banks, and today, there are more serious opportunities to access this category in the future of the digital monetary system than cryptos issued by private entities or bitcoin in the current state of affairs. If a Central Bank issues a CBDC, the idea of strategic reserves of crypto assets could also imply the hypothesis that some digital assets (such as Bitcoin) are supporting those digital currencies in a basket of digital assets.
D) Regulatory changes to admit crypto assets in the reserves:
The regulatory framework would also have to evolve to allow crypto assets to be "integrated" into central banks' balance sheets. This would imply significant changes in the rules defining the money supply (M0, M1, M2, etc.) under the Basel system mentioned above. Currently, these categories are reserved for traditional currencies and bank assets. Still, in a scenario where crypto assets are accepted as strategic reserves, these definitions must necessarily be reformulated.
In a nutshell: Steps to follow to integrate cryptos and bitcoin into Central Bank balance sheets
For crypto assets and Bitcoin to get integrated into the balance sheets of the Central Banks and perform strategic support functions, several steps would be needed:
1. Regulation and Legal Recognition: Crypto assets must be legally recognised as valid financial assets. This implies a clear regulation that defines their status, tax treatment, and custody rules.
2. Valuation and Accounting: Establish consistent and internationally accepted valuation methods for crypto assets. This is crucial for their inclusion in central banks' balance sheets.
3. Custody and Security: Develop secure infrastructures for the custody of crypto assets, including cold storage solutions and cybersecurity protocols.
4. Liquidity and Secondary Markets: Ensure that there are liquid markets for purchasing and selling these assets, allowing Central Banks to buy and sell crypto assets as needed.
5. International Coordination: Establish international agreements for managing and using strategic reserves, including crypto assets, avoiding regulatory arbitrations, and promoting global financial stability.
3. How could the integration of strategic reserves of crypto assets (and also Bitcoin) be achieved in the traditional monetary system?
Three issues were conveyed to this process:
A) Acceptance of stability and correlation with trust reserves:
The first step would be for central banks, especially the Federal Reserve or the European Central Bank, to accept that Bitcoin and other crypto assets could be part of their reserves instead of just traditional currencies and precious metals. This would imply a constant evaluation of its inclusion's stability and macroeconomic impact.
B) Possibilities of global financial regulation:
The EU MICA has already established a framework for crypto assets, which facilitates the analysis and regulation of digital assets. However, harmonisation on a global scale would be essential to allow crypto assets to be accepted as reserves within the balance sheets of central banks. This harmonisation is neither expected soon nor without first resolving the main problem of current legal and banking money: its nature of being money-debt in a state of affairs where the debt already issued is unaddressable.
C) Creation of a global protocol:
Once clear rules have been established for crypto assets in the global financial context, central banks could create a protocol that allows the inclusion of crypto assets, including Bitcoin, in a secure and monitored way. This could mean opening the possibility for the tokenisation of traditional assets and allowing greater flexibility in the type of assets that support the reserves of the BCs.
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The integration of cryptoassets, including Bitcoin and EMTs, into the balance sheets of Central Banks and into money supply requires a clear regulatory framework, secure infrastructures, and international coordination. It should be understood that EMTs, under MICA regulation, have a clearer path towards their acceptance as electronic money, Bitcoin and other decentralised cryptocurrencies face greater challenges due to their volatility and lack of central issuer. However, with time and the evolution of regulations, we may see a greater integration of these assets into the global financial system.
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