Central Banks and Bitcoin: Inside the Czech National Bank's Pioneering Custody Experiment

For a long time, the relationship between central banks and Bitcoin has been fraught with skepticism and hesitation. While many monetary authorities have considered issuing central bank digital currencies, few have seriously considered holding Bitcoin as a reserve asset. However, the Czech National Bank's launch of a pilot project to test the direct custody of Bitcoin has fundamentally changed this landscape—potentially reshaping our understanding of sovereign wealth management in the digital age.

To understand the significance of this development, CoinRank interviewed Trezor analyst Lucien, who has long followed the Bitcoin market and the evolution of self-custody. Based in Prague, Lucien has in-depth knowledge of the Czech Bitcoin ecosystem and offered unique insights into why this move by the Czech National Bank (CNB) is important and its impact on future monetary policy and financial sovereignty.

Sandbox Operation Method

“This is not what many news headlines suggest,” Lucien clarified at the start of the conversation. “The Czech National Bank did not immediately include Bitcoin in its official reserves. They created what is known as an operational sandbox—a $1 million test portfolio that included Bitcoin, a dollar stablecoin, and a tokenized bank deposit.”

He explained that this controlled environment serves a specific purpose: to build internal capabilities before making larger commitments. “The sandbox environment allows central banks to gain practical experience across all aspects, from custody and key management to anti-money laundering compliance, accounting, and on-chain settlement and auditing,” Lucien elaborated. “It’s a learn-by-doing approach, quite different from the theoretical discussions that have dominated the central banking community for years.”

When asked about the timing of the move, Lucien pointed to an interesting paradox. “Just ten months before the Bank of Italy launched this pilot program, ECB President Christine Lagarde stated unequivocally that no central bank on the ECB General Council would get involved with Bitcoin. Now, however, we are seeing a member state doing just that.” He paused, then added, “This disconnect reveals a significant difference in how different monetary authorities approach innovation and risk management – some remain ideologically opposed, while others are willing to experiment.”

Lucien points out that this move aligns closely with the overall strategy of Aleš Michel, the governor of the National Bank of Brazil. “Michel has been publicly discussing the potential of Bitcoin in long-term investment and has guided the bank to diversify its reserves, including significant gold purchases. This test portfolio was actually proposed by him in January 2025, reflecting a well-thought-out philosophy rather than a passive response to market pressures or public sentiment.”

Bitcoin as a bearer asset

In our discussion, Bitcoin was frequently referred to as "digital gold." When asked about this comparison, Lucien responded, "I think that's fundamentally accurate, but there are some important nuances. The key is to understand Bitcoin as a bearer asset, similar to gold, whose sovereign value comes from direct ownership, not from claims on other entities."

He compared this to traditional foreign exchange reserves: "Foreign exchange reserves operate on completely different principles. They are ultimately claims on another government system, which inevitably introduces political risks. Bitcoin and gold do not have this risk because institutions can directly hold them."

When asked if Bitcoin is truly superior to gold, Lucien became even more enthusiastic. “Bitcoin may be superior to gold in practical terms. Gold requires vaults, insurance, armed transport, and laboratory verification—all of which incur enormous costs and complex logistics. Bitcoin requires proper key management, but once institutions master this capability, the security and efficiency of asset transfer are greatly enhanced. Settlement takes only hours instead of weeks, and the cost structure is completely different.”

He also emphasized another key advantage: "The inherent transparency offered by Bitcoin is something that gold simply cannot match. For example, El Salvador shares its Bitcoin holdings on-chain in real time, which anyone can independently verify. With gold reserves, the public can only trust data published by the central bank. But with Bitcoin, this transparency is built into the protocol itself."

Key Management Challenges

When discussing the operational challenges faced by central banks, Lucien stated without hesitation: "If there is one obstacle that stands out most in operations, it is key management. This is the biggest challenge because it is extremely complex and has no security guarantees—Bitcoin transactions have no undo button. Any error in key management can mean permanent, irreversible losses."

He continued, “The good news is that financial institutions have a grasp of multi-level authorization in principle. For decades, banks have used dual-signature systems, where larger transactions require multiple signatures. Bitcoin multisignature is essentially a cryptographic version of this concept.”

But Lucien emphasizes that the key difference is: "The challenge lies in the enforcement mechanism: it's about mathematical principles, not internal policies. You can't be above the rules, and you can't make exceptions, which means that governance and signing procedures must be flawless from the outset."

He analyzed one by one the specific issues that kept central bank officials up at night: "Who holds which keys? What is the signature threshold? What should be done if someone leaves the institution or an emergency occurs? How to securely rotate keys? How to implement a backup system without introducing new vulnerabilities? Each question involves pros and cons that must be carefully weighed."

“These problems are solvable,” Lucien assured, “but it requires building entirely new operational capabilities. That’s why CNB uses the sandbox approach—it allows them to address these challenges with limited risk before scaling up.”

The unique status of the Czech Republic

As the conversation turned to the Czech Republic, Lucien's enthusiasm for his homeland's Bitcoin ecosystem became evident. "The existing Bitcoin infrastructure in the Czech Republic is often overlooked," he said. "Unlike many countries that need central banks to guide public acceptance of Bitcoin, the Czech public doesn't need encouragement. They have been enthusiastically using Bitcoin for over a decade."

He rattled off a series of impressive contributions: “The Czech Republic is home to the world’s first mining pool. The first hardware wallet, Trezor, was also born here, and we have contributed to many of the Bitcoin standards that are still in use today. Prague is often called the Bitcoin capital of the world, with more than 1,000 places across the country where Bitcoin can be traded—making it one of the most concentrated areas for Bitcoin trading in Europe.”

“This is not just a theoretical application,” Lucien emphasized. “It has been integrated into daily business activities. The world’s first Bitcoin conference was held in Prague in 2011, and today the city hosts BTC Prague, the largest pure Bitcoin conference in Europe.”

When asked about the regulatory environment, he emphasized a key advantage: "Czech law has supported the adoption of Bitcoin in a practical way. Holding Bitcoin for three years or more is tax-exempt. Daily Bitcoin payments are also tax-free. These policies demonstrate that the government understands the potential of Bitcoin and has created an environment that both encourages long-term holding and facilitates daily use—a rarity in European regulatory frameworks."

Lucien offers an interesting perspective on the relationship between public and institutional adoption: “The public’s level is already far ahead of many EU countries. The pilot project of the National Bank of Italy was not intended to encourage public adoption, but rather to allow the central bank to catch up and improve its capacity in potential reserve management. This overturns the usual narrative that monetary authorities lead and the public follows.”

Comparison of regulatory methods

In discussing how other jurisdictions can follow the Czech model, Lucien raised an important distinction. “It is crucial to understand that two different types of initiatives are often confused,” he explained. “Singapore, Switzerland, the UAE, and increasingly the US, have been building comprehensive regulatory frameworks for the retail cryptocurrency market—including licensing for exchanges, custody service providers, stablecoin issuers, and the tokenization of traditional securities.”

He continued, “The CNB’s pilot program represents a fundamentally different situation. It is an internal operational experiment within the central bank itself. It is not a regulatory framework open to the public, but rather a matter of assets held on the monetary authority’s own balance sheet. These are independent institutional decisions and are not necessarily related to each other.”

He emphasized the uniqueness of the Czech approach: "The Czech Republic is pursuing both approaches simultaneously. They have established reasonable retail rules—tax exemption for everyday Bitcoin payments, a three-year capital gains tax exemption—and now the central bank is actively testing the feasibility of Bitcoin as a reserve. Most jurisdictions only adopt one approach, rather than both."

When asked about the Czech regulatory philosophy, Lucien stated bluntly: "It emphasizes learning through practice rather than endless theoretical debates. While other regions are still drafting discussion documents and policy recommendations, the Czech National Bank has already directly focused on improving its operational capabilities. This is a pragmatic approach that prioritizes practical experience over bureaucratic discussions."

Impact on the future of currency

As the conversation drew to a close, I asked Lucien for his outlook on the future. “Predicting the exact trajectory of the global monetary landscape over the next ten to fifteen years is speculative,” he admitted. “But some fundamentals remain clear. Bitcoin’s supply schedule and monetary policy are fixed and transparent—you know exactly what you’re going to get. Fiat currencies are much less certain because their supply can change based on political decisions.”

He believes early adopters have a significant advantage: "Central banks that understand Bitcoin's role as a neutral sovereign asset—especially smaller, more responsive ones—may gain a considerable advantage. They can act faster than larger institutions constrained by political consensus and bureaucratic inertia, which could give them an edge in the next currency crisis."

Lucien emphasized: "Bitcoin fundamentally offers choice. It applies equally to everyone, regardless of jurisdiction or institutional size, and provides the same protection. In the coming years, whether central banks choose to use this tool, and how effectively they implement it, will likely determine which monetary authorities will succeed and which will struggle."

He cautiously clarified: "This is not about replacing fiat currency with Bitcoin; rather, it's about providing an additional option for reserve diversification."

In his concluding remarks, Lucien reiterated the Swiss National Bank's pilot project: "Institutions that are now setting up Bitcoin custody capabilities have an advantage over those that ignore this area. While the Swiss National Bank's pilot project is small, at only $1 million, the operational experience they are gaining could become invaluable as the monetary landscape evolves. In a world where sovereign financial instruments are increasingly scarce, understanding how to custody bearer assets without involving counterparty risk represents a significant strategic advantage—one that will accumulate over time."

“Currently, the Czech National Bank’s experiment remains just that – an experiment,” he concluded. “However, its very existence challenges long-held perceptions of what central banks can and should do. Whether other monetary authorities will follow suit remains to be seen, but the door has been opened. In the realm of monetary policy, as in many other areas, the gap between theory and practice is often more important than the theory itself. The Czech National Bank has chosen practice, and thus provides a roadmap for other central banks that choose to explore this path.”