CAMBRIDGE, MASS.— Bitcoin was invented to circumvent the world’s central banks, so the idea that those banks would start buying Bitcoin in bulk ranks somewhere from counterintuitive to far-fetched. But after Western governments froze Russia’s foreign exchange reserves early this year, speculation mounted that some central banks would acquire cryptocurrency as a form of insurance against financial blockades from the U.S. and its allies. In the months since, it has remained little more than speculation. But the idea has remained a fixation among Bitcoin investors, who tend not to support U.S. foreign policy objectives, and who view it as a good thing that crypto could provide a workaround. Bitcoiners’ hopes often revolve around the Gulf states, with their huge cash reserves and often-fraught relationships with the West. In August, a Twitter account inspired by the possibility, Sheikh Roberto, sprouted up to promote Bitcoin usage and slam the Fed in posts from El Salvador. Last week, we pressure-tested this idea in conversations with crypto entrepreneurs on the sidelines of the Milken Institute’s Middle East summit in Abu Dhabi. There, we picked up no hint that Gulf state central banks were considering Bitcoin purchases, despite their interest in blockchain technology. But elsewhere the idea is very much alive, at least in theory. A new working paper on the subject by Matthew Ferranti — a fifth-year PhD candidate in Harvard's economics department and advisee of former Fed board governor Ken Rogoff, now a Harvard professor — has caused a minor splash. In it, Ferranti argues that it makes sense for many central banks to hold a small amount of Bitcoin under normal circumstances, and much more Bitcoin if they face sanctions risks, though his analysis finds gold is a more useful sanctions hedge. DFD caught up with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial publication online late last month. What are the implications of your findings? You can read op-eds, for example in the Wall Street Journal, where people say, “We overused sanctions. It’s going to come back to bite us because people are not going to want to use dollars.” But the contribution of my paper is to put a number on that and say, “Okay, how big of a deal is this really? How much should we be concerned about it?” The numbers that come out of it are that yeah, it is a concern. It's not just you change your Treasury bonds by 1 percent or something. It's a lot bigger than that. Rather than hedging sanctions risk with Bitcoin, shouldn't governments just avoid doing bad things? There's not just one thing that gets you added to the U.S. sanctions list. If the only thing that could get you sanctioned, for example, was to invade another country, then most countries, as long as they don't plan to invade their neighbors, probably don't need to care about this at all, and so my research becomes less relevant. But it's kind of a nebulous thing. That might make countries pause and think about, “How reliable is the U.S?” The paper doesn't say anything about whether applying sanctions is a good or bad thing. There's a huge literature on how effective sanctions are. And I think the number that comes out of that is like a third of the time they work. Of course, they can have unintended consequences, like hurting the population of the country that you're sanctioning. We hear a lot about crypto and sanctions evasion, but from the perspective of central bank reserves, you find that gold is a more useful hedge. Why? Because it's so much less volatile. It's like five times less volatile. [Coincidentally or not, the level of gold accumulation by central banks smashed its previous all-time record in the third quarter of this year, though it remains a mystery which central banks were doing the buying. -Ed.] So why would a central bank bother with Bitcoin? They’re not correlated. They both sort of jump around, so there’s diversification benefit to having both. And if you can’t get enough gold to hedge your sanctions risk adequately — think about a country that has very poor infrastructure, doesn’t have the capability to store large amounts of gold, or countries whose reserves are so large that they simply cannot buy enough gold. Places like Singapore and China. You can’t just turn around and buy $100 billion of gold. Based on Russia’s disastrous experience with privatization in the 1990s, some would say the lesson of recent history for non-Western countries is, “Beware of Harvard economists bearing advice.” Should people trust your findings? [Laughs] This is a framework for thinking about this topic. You may or may not agree with the assumptions built into it. Change the number and re-run the thing and you’ll get results that are personalized to your beliefs. If you were advising the Treasury Department on its sanctions policy, what would you tell them? I think the decision to freeze a country’s reserves is so consequential it would have to be made by the president. What would you tell the president? Try to put concreteness on the nebulousness of how we apply sanctions.
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