Summary Bitcoin has a unique characteristic as a financial asset: it is nobody else’s liability. This makes it particularly attractive to central banks the world over. Central banks hold a total of between $40 trillion and $50 trillion in reserve assets. Should they wish to diversify their dollar holdings over time toward crypto assets, this would be a powerful source of Bitcoin demand, potentially to a BTC price of $1 million. ARK Invest CEO Cathie Wood’s call on Bitcoin (BTC-USD) hitting "$1 million by 2030" in late November 2022 was widely received as outlandish, but Bitcoin's features are such that this scenario cannot be ruled out. BTC shares with gold and silver a unique characteristic for a financial asset: it is nobody else’s liability. This is often touted by Bitcoin promoters as a way to shield citizens’ assets from the legacy banking system perceived as predatory when it comes to fund transfers, and lacking as regards privacy. Holding Bitcoin in cold storage is a guarantee of complete control of one’s holding, while a bank account can only be accessed with the bank assent. It is important to stress that only cold storage entails this unique characteristic: holding Bitcoin with an institution, be it an intermediary or an exchange, deprives Bitcoin of this most precious quality, as FTX customers just found out. While this clearly is important to certain individuals -libertarians in particular- this is even more important for countries: central banks hold reserve assets in order to ensure they can fund imports from abroad as needed or to prop up the value of their national currency when it becomes under pressure if investors exit the country. Currently, the bulk of these reserve assets are in US$ and, for some countries, in gold. The relationships between the world central banks is what comprises the International Monetary System, namely the links that allow trade between countries (imports and exports) and cross border financing and investments. The international monetary system is built on the US$ as the reserve currency. What is a reserve currency? It is the currency unanimously accepted as settlement for cross border transactions. It is also the currency in which commodities and oil are denominated. The US$, as all fiat currencies, is the liability of the central bank issuing it, the Fed in this case. As all fiat currencies, the dollar is in fact debt. It is debt issued by the dominant country, the US. As cross border trade and investment expand, there is a need for a steady supply of reserve currency, so the issuing country can add to its debt, which we in the US happily do. Adding to debt for a country means consuming more than producing, so importing more than exporting, running a trade deficit, and Congress spending more than tax receipts, running a budget deficit. Economists call the resulting shortfall “running a current account deficit”, namely having foreigners finance your excess spending. So essentially issuing a reserve currency is akin to an individual signing off on the grocery store invoice and never paying for it, as the shop owner can use the signed invoice to pay its vendors or creditors who are accepting the claim on that privileged individual as settlement. We in the US are that privileged individual. This alleviates the US budget constraint: we can spend more than we produce. It also gives the US a fearsome power over other countries. We can impose biting sanctions on hostile foreigners: North Korea, Iran, Afghanistan and now Russia can attest to that. What happens if the acceptance of US IOUs as mean of settlement - and the power this entails for the US - becomes questioned? There would be a need for a substitute asset. This actually happened in the past as in the ‘60s France’s General de Gaulle and the French economist Jacques Rueff deemed the US$ role as an “exorbitant privilege” and moved France’s gold from the New York Fed vaults back to Paris. De Gaulle’s political legacy essentially wilted and nothing came out of it. But the current situation is different. In particular, the China/US fault line is widening. Sanctions on Russia have sent a clear US message to would be dissenters: “You can run but you can’t hide since your assets are our liability, so they’re as good as we want them to be”. Should that message encourage US$ holders to try and diversify away from the Greenback, the question becomes what substitute could, if not replace, at least complement the dollar? Gold is the existing candidate: Gold indeed is nobody else’s liability: it is already a traditional central bank reserve asset. Its role is hampered by its unequal repartition. It is mostly held by the traditional advanced economies, the US and Continental Europe. It also suffers from cumbersome transfer procedures for settlement purposes. It is equally poorly divisible. There is definitely room for an alternative asset sharing gold’s characteristics but devoid of those drawbacks. Crypto assets held in cold storage solve all above issues. Others have advocated this idea. Let’s stress that Central banks have already developed a keen interest in digital currencies, but for the wrong reasons: Central Bank Digital Currencies (CBDCs) would be the national central bank’s liability - much different from Bitcoin - and would in fact potentially allow greater government control over citizens. The Fed published an extensive study on CBDCs, highlighting privacy concerns as well as impacts on the legacy banking system. Elsewhere, the digital yuan is already widely used in China, at an experimental stage, potentially eliminating any privacy for local citizens. Bitcoin’s finite nature is a key part of its attraction. True, there’s no shortage of competition from other cryptos. Nevertheless, Bitcoin's decentralization and security are peerless among crypto assets and therefore make it appropriate as a global unimpeded reserve asset. It is scarce, fungible, immutable, un-seizable, pseudonymous, peer to peer, not requiring trust or permission. As such, Bitcoin checks all the boxes of the ideal reserve asset: held in cold storage, it is the ultimate holding providing ironclad benefits as a last resort store of value. Should the move toward using the BTC as a reserve asset materialize, price implications would obviously be dramatic. Currently, the total of central banks' reserve assets amounts to anywhere between $40 trillion and $50 trillion. Should half of those reserves be over time converted into BTC, $25 trillion would be chasing the total amount of 21 million BTC. The math is easy to do, we would indeed be looking at a BTC price of roughly $1.2 million. In contrast to Cathie Wood, I do not expect this to happen between now and 2030. Still, I do not rule out a phasing in of BTC holdings by central banks for all the reasons above. This would provide a strong official sector demand propping up the value of Bitcoin, potentially to that mystic million dollar number over time. Risks to this scenario So far, only a small country, El Salvador, has decided to add Bitcoin to the foreign reserves, triggering strong criticism from the International Monetary Fund, not keen in allowing countries to break free of IMF dependency. Russia’s fate as being kicked out of access to its reserves may nevertheless inspire others in diversifying their assets away from other countries' liabilities. Bitcoin offers such an option, as gold is already concentrated among few countries. Bitcoin volatility can also be viewed as a major deterrent, since a reserve asset needs to have a predictable value. A move toward its inclusion among reserve assets would to a large extent provide Bitcoin with a legitimacy likely to propel its value higher, way higher, and trigger a virtuous cycle where the current untethered value (pun intended) would be replaced by an orderly appreciation followed by a stabilization at a high level.