Czech Your Portfolio

The UK’s financial asset posture looks anachronistic and naïve

Bitcoin Policy UK

Mar 05, 2025

Thanks to Bitcoms for this guest publication

The order is rapidly fadin'...

For the times they are a-changin'

Bob Dylan

The Bank of England, the UK’s Central Bank (Photograph by Bitcoms)

Foreign Exchange Reserves

Countries hold foreign exchange reserves to maintain liquidity in times of crisis, reassure foreign investors, help meet external liabilities, fund internal projects, and (where applicable) manipulate their own currencies^[1]^[2]. These reserves are often held in central banks.

The Czech National Bank (CNB) made headlines^[3] recently as it is considering allocating a small proportion of its reserves to Bitcoin. Caution is warranted of course: central banks are by nature conservative, and Bitcoin as a financial asset is novel and emerging. But equally, investigation is also imperative: Bitcoin is increasingly being held, either directly or by proxy, by large institutions such as listed companies^[4], pension funds^[5], charities, university endowments^[6] and countries^[7]. Holding it as a designated strategic asset is also being formally considered by around half of US States^[8] and the US federal government^[9]. Today, any central bank not studying Bitcoin should be seen as irresponsible. “The world, the economy and people’s behavior are constantly changing and I think we should be prepared to reflect that in how we think and what we do,” says CNB Governor Ales Michl^[10].

Critics of his cautious investigation may miss that the CNB is in many ways uncommonly conservative: at 45% of GDP^[11], its foreign exchange reserves are immense compared with the UK’s, whose equivalent ratio is around 6%^[12]. According to the Bank of England^[13] (BoE), the UK’s reserves are made up only of foreign currencies (mainly bonds), International Monetary Fund instruments and gold. The CNB’s strategy, by contrast, is to embrace a wider range of assets^[14], which in finance is generally considered a more prudent approach to managing risk. “We are also diversifying reserves,” said Michl, who also plans to increase existing holdings of both gold and equities^[15].

Unlike the Czech Republic, then, the UK’s reserves look small in size and narrow in range.

Neutral Reserves

Both British and Czech reserves are dominated by permissioned assets created and controlled by third parties, such as foreign government bonds and IMF-issued instruments. With their value dependent on the good faith of the issuer, these contrast with neutral assets such as Bitcoin and gold which have no central issuer and no such dependency. The UK does hold 310 tonnes of gold, which make up around 12% of reserves^[16]. But this is unusually small compared with peer countries, which mostly place greater emphasis on neutral assets. According to a 2024 global ranking of official gold reserve holdings^[17], France and Italy have over 70% of their reserves in gold, as does Germany, which holds over 3,300 tonnes, more than ten times the UK’s amount. Despite having a GDP only one quarter the UK’s size, Switzerland holds more than three times the UK’s gold. In terms of tonnage, Britain’s gold reserves rank between Uzbekistan and Kazakhstan, countries whose GDP is a mere fraction of the UK’s.

This is a long-lingering effect of ‘Brown’s Bottom’^[18], when Britain (like Czechia) sold most of its gold reserves in the pit of a protracted bear market around the turn of the millennium^[19]. Now widely seen as a mistake, these sales realised a paltry one tenth of that gold’s value today. It is notable that while the Czechs are already rebuilding their gold reserves, the British are not.

The Times Are Changing

That mere quarter century ago, the world looked very different. The 1971 Nixon Shock and the end of gold-backed currency no longer felt like an experiment. The close Anglo-American co-operation of Thatcher and Reagan was being reprised with Blair and Bush, and tighter integration of the UK within the EU seemed likely^[20]. After the collapse of Communism and The End of History^[21], hubristic British officials saw little need for neutral gold reserves, and turned more towards assets issued by friendly nations denominated in fiat currencies, especially the US dollar (the entrenched global reserve^[22]) and the newly-created Euro.

But those times are long gone. Britain has left the EU, and its ‘special relationship’ with the US has withered. We have entered an era of heightening Realpolitik, when self-interest (typified by the US’s ‘America First’ agenda) is gaining traction. Larger European economies such as France, Italy and Spain are now heavily indebted with debt to GDP ratios above 100%^[23], and Germany’s economy, the world’s third largest, looks set to struggle long term^[24]. This all adds up to likely trouble for Euro-denominated government bonds. As for the US, its spiralling post-war record national debt^[25] incentivize it towards dollar devaluation, which would also support its now-burning ambition to re-industrialize^[26]. Some commentators even see US debt restructuring as likely^[27]. Worse, in recent years the US has even frozen^[28] or seized^[29] its own bonds, rendering them (quite literally) not worth the paper they’re written on for the countries which held them.

Most of these risks seemed unthinkable 25 years ago. With these changes, it is little surprise that in recent times central banks have pivoted towards neutral assets by buying gold in record quantities^[30]. The UK, however, has bought none, and is increasingly looking left behind and out of step, with a low level of neutral reserves which foreign issuers cannot unilaterally debase or confiscate. It needs to catch up. Decentralised, uncensorable and free from counterparty risk,^[31] Britain should follow Czechia’s lead and consider Bitcoin as a useful complement to gold as a neutral reserve asset, especially given the historically low correlation between the two.^[32]

Beneath the Bank of England, close to its subterranean gold vaults^[33] (Photograph by Bitcoms)

Beyond Currency Reserves

But it isn’t only at government level the UK looks insufficiently diversified and overly exposed to assets dependent on the good graces of foreign monetary authorities: the phenomenon pervades society, through private financial institutions down to individuals. For example, according the US government^[34], the UK is the third largest foreign holder of US Treasuries^[35] with over three quarters of a trillion dollars worth. This amounts to almost an entire quarter of UK GDP. No other foreign Western nation holds anywhere near half as much US debt as the UK, with Germany, a far larger economy, holding barely an eighth of the UK’s total. Even worse, the British hold almost exactly the same amount as the second-placed Chinese, whose economy - at six times the size of the UK’s - is much better placed to absorb a US debt shock.

So it isn’t just the UK government that looks overly reliant on such ‘risk-free’ foreign-permissioned assets. From large private pension funds to small individual investors’ portfolios, Britons might do well to factor permissionless^[36] and finite^[37] Bitcoin into their deliberations on asset allocation and diversification. As Aleks Michl points out,^[38] Bitcoin “currently has zero correlation to bonds and is an interesting asset for a large portfolio”, and it is far more practical than gold^[39].

The Czech Edge

Why are the Czechs able to adapt to a changing world, while the Brits stay stuck in a state of late-20th-Century paralysis? Perhaps the answer is partly cultural.

“For six hundred years, the Czech people found themselves in the middle of a seemingly never-ending battle over the control of their freedoms.” says Jason Deane, the British author of a new free e-book From Defenestrations to Bitcoin^[40]. “We've had it far easier than the Czechs in many ways when it comes to oppression. While this has arguably made our lives easier.. we have much to learn from [them].”

Czech citizens have “a cultural and historical mindset that values financial independence and skepticism”, says Lucien Bourdon of Trezor, a Bitcoin-focused company in the Czech Republic. “Even today, Czechs tend to be pragmatic about money and financial sovereignty…That same independent mindset is why so many Bitcoin innovations originated here. Bitcoin is deeply embedded in the Czech Republic’s business culture, innovation ecosystem, and financial landscape. While many countries are still debating regulations, Czechia has been actively using, building, and shaping Bitcoin’s future for over a decade.”

“Prague has one of the highest concentrations of Bitcoin-accepting merchants in the world,” continues Bourdon. “Cafés, bars, and businesses have accepted Bitcoin since the early 2010s, and the city has a thriving Bitcoin circular economy.” And it isn’t just Prague - merchants accept Bitcoin all over the country^[41]. Czechs have also pioneered fundamental technical developments which have greatly influenced how the global Bitcoin network operates today, such as the first mining pool in 2010 and the first hardware ‘wallet’ in 2013. In 2025, tax and regulatory changes look set to confirm the Czech Republic as one of the most Bitcoin-friendly jurisdictions, whether held as a financial asset or used as a monetary good^[42].

“Now, while the European Central Bank continues to criticize Bitcoin^[43], the Czech National Bank is openly assessing whether it could strengthen its reserves,” says Bourdon. “As scepticism toward the euro grows and financial uncertainty rises, Czechia’s independent approach may put it ahead of the curve.”

The Order is Fading

With the international ‘rules-based’ order^[44] showing signs^[45] of fracturing^[46], such an independent approach may be more important than ever. “Europe must now start the painful process of ‘de-risking’ its relationship with the US, looking for areas of dangerous dependence on America and stripping them out of the system,” urged a recent Financial Times opinion piece^[47]. From a financial perspective, this warning should apply to Britain more urgently than most. As older Czechs remember well, the shattering of the Soviet Bloc violently ruptured long-standing relations not only with Russia but also with its other satellites. The British would be wise to bear that in mind as alliances built on Atlanticism strain and splinter.

Against this backdrop, the UK’s current financial asset posture looks dangerously anachronistic and naïve. Nowadays, assets issued by foreign monetary authorities are far from ‘risk free’, and (since the advent of Bitcoin) permissionless neutral assets don’t need to be physical. At national, institutional and individual levels, Britain should take a healthy dose of Czech scepticism and move its thinking out of the 20th Century and into the 21st.

By Bitcoms

^[1] https://www.weforum.org/stories/2022/08/foreign-currency-reserves-global-economic-crisis/#:~:text=What%20is%20a%20foreign%20currency,Index%2C%20a%20financial%20services%20provider.

^[2] https://www.cityindex.com/en-uk/news-and-analysis/what-are-currency-reserves/

^[3] https://www.reuters.com/technology/czech-central-bank-governor-present-plan-hold-reserves-bitcoin-ft-reports-2025-01-29/

^[4] https://www.ft.com/content/f964fe30-cb6e-427d-b7a7-9adf2ab8a457

^[5] https://www.ft.com/content/4146fbca-2930-41ef-965d-9cc8ea1d9aaf

^[6] https://www.ft.com/content/cb9511a5-5df7-4ba7-974a-2f00d9d2128c

^[7] https://treasuries.bitbo.io/countries/

^[8] https://www.bitcoinstatesofamerica.com/usa/strategic-bitcoin-reserve

^[9] https://www.whitehouse.gov/presidential-actions/2025/01/strengthening-american-leadership-in-digital-financial-technology/

^[10] https://www.bloomberg.com/news/articles/2025-02-06/bitcoin-musings-draw-scrutiny-over-czech-central-bank-governor

^[11] Per https://www.ft.com/content/a3c06f8f-34ad-4065-bcf4-97670230824f