SNB President Douses Bitcoin Reserve Hopes

The Swiss National Bank (SNB) has recently expressed its reservations about Bitcoin's suitability as a reserve asset, citing concerns over volatility, liquidity, and security. SNB President Martin Schlegel's comments have dampened the spirits of Bitcoin proponents who have been pushing for its inclusion in Switzerland's reserves.

Schlegel's primary concern is Bitcoin's volatility, which he believes makes it an unsuitable candidate for a reserve asset. Central banks require assets that maintain their value over extended periods to provide a stable foundation for economic policy. Bitcoin's price, however, is notoriously volatile, with significant spikes and crashes, such as the 2017 surge from below $1,000 to almost $20,000 and the subsequent drop to around $3,000. More recently, external factors like Elon Musk's tweets have triggered substantial price fluctuations. This erratic behavior contrasts with the stability typically associated with reserve assets like gold or government bonds, making it challenging for central banks to effectively manage monetary policy.

Schlegel also raised concerns about Bitcoin's liquidity. For a central bank to implement monetary policy, its reserves must be readily convertible into other assets or currencies. He questioned whether Bitcoin has sufficient liquidity to meet these demands. In a hypothetical scenario where Switzerland faces an unexpected economic shock, the SNB might need to intervene in the foreign exchange market to defend the Swiss franc. However, if the SNB attempts to sell a large portion of its Bitcoin reserves, it could saturate the market, leading to a price drop and limiting the SNB's ability to participate effectively.

The digital nature of Bitcoin also introduces inherent security risks. As Schlegel noted, software can have bugs and other vulnerabilities, making Bitcoin susceptible to attacks such as hacking and theft. The crypto industry has suffered from several security incidents, including the collapse of Mt. Gox and the hacking of decentralized finance (DeFi) platforms. These incidents highlight the omnipresent risk of software vulnerabilities and the challenges faced by both individual and institutional digital asset holders in securing their assets. For a bank entrusted with public money, these security risks are a significant concern.

Schlegel also argued that the cryptocurrency industry is still a niche phenomenon within the global financial system. While the cryptocurrency market is valued in the trillions, it remains a tiny sliver of total global financial assets. This perception contributes to the SNB's