Harvard paper on central banks: Buy Bitcoin!

With assistance from Derek Robertson and Daniel Lippman

CAMBRIDGE, MASS.— Bitcoin was invented to bypass the world’s central banks, so the idea that those banks would start buying Bitcoin en masse ranges from counterintuitive to short-sighted.

But after Western governments froze Russia’s foreign exchange reserves earlier this year, speculation grew that some central banks would buy cryptocurrencies as a form of insurance against financial blockades by the United States and its allies.

In the months that followed, it remained little more than speculation. But this view has remained a constant among Bitcoin investors who do not support US foreign policy goals and see it as a good thing that cryptocurrency can provide a solution.

Bitcoiners’ hopes often revolve around the Gulf states. with its large cash reserves and often strained relations with the West. In August A Twitter account Inspired by this possibility, Sheikh Roberto sprouted up to promote the use of Bitcoin and criticize the Fed in posts from El Salvador.

Last week we put this idea to the test In conversations with crypto entrepreneurs as part of the Milken Institute’s Middle East Summit in Abu Dhabi. there, Despite the interest of the central banks of the Gulf state in blockchain technology, we have not received any indication that it is considering buying Bitcoin.

But elsewhere, the idea is very much alive, at least in theory. New working paper Matthew Ferranti, a fifth-year PhD candidate in Harvard’s economics department and advisor to former IMF and Federal Reserve Board of Governors economist Ken Rogoff, now a Harvard professor, caused a bit of a stir.

Here, Ferranti argues that it makes sense for many central banks to hold more Bitcoin under normal circumstances when faced with small amounts of Bitcoin and sanctions risks, although his analysis finds gold to be a more useful sanctions hedge.

DFD met with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial publication online late last month.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?

For example, in the “Wall Street Journal” people said, “We used sanctions too much. It will come back to bite us because people won’t want to use the dollar.” But the contribution of my article is to put a number on it and say, “Well, how big of a deal is this really? How worried should we be about that?”

The numbers coming out of it are, yes, worrisome. It’s not just about changing your Treasury bonds at 1 percent or whatever. It’s much bigger than that.

Instead of hedging the risk of sanctions with Bitcoin, should governments avoid doing bad things?

There is no single thing that adds you to the US sanctions list.

If the only thing that could get you sanctioned was, say, invading another country, then you probably don’t need to worry about that unless most countries plan to invade their neighbors, etc. my research becomes less relevant.

But it’s kind of a hazy thing. It makes countries stop and ask, “How reliable is the US?” can make you think about.

The paper says nothing about whether the imposition of sanctions is a good or bad thing. There is a large 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 such as harming the population of the country you are sanctioning.

We hear a lot about cryptocurrency and sanctions evasion, but you see gold is a more useful hedge in terms of central bank reserves. Why?

Because it is less volatile. It is 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 should a central bank bother with Bitcoin?

They are not related. Both are jumps of some sort, so having both has a diversification benefit.

If you can’t get enough gold to adequately hedge your sanctions risk – think about countries that have very poor infrastructure, don’t have the ability to store large amounts of gold, or have such large reserves – buy enough gold. Places like Singapore and China. You can’t just turn around and buy $100 billion worth of gold.

Based on Russia disastrous experience With privatization in the 1990s, some would say that the lesson of recent history for non-Western countries is to “beware the advice of Harvard economists.” Should people trust your findings?

[Laughs] This is a framework for thinking about this topic. You may or may not agree with the assumptions embedded in it. Change the number and run the job again and you will get results tailored to your beliefs.

If you were advising the Treasury Department on sanctions policy, what would you tell them?

I think that the decision to freeze a country’s reserves is so effective that it should be made by the president.

What would you say to the president?

Try to bring concreteness to the vagueness of how we apply sanctions.

The White House published last Friday one humble looking memo this has major policy implications.

In the letter, Shalanda D. Young, director of the Office of Management and Budget, instructs federal agencies to follow the established guidelines. order from the beginning of this year which ordered them to “quantum-proof” their cryptographic systems. The guidance includes telling agencies to report on their most vulnerable systems by next May, agencies to appoint someone to lead such “cryptographic inventory” projects, and to require each agency to produce an annual report. up to 2035 deadline for quantum-proof federal systems.

When this kind of bureaucratic detail is taken care of, you know the government is serious. The memo also creates a task force to help coordinate the more than decade-long quantum testing project, led by Chris DeRusha, the Biden administration’s chief information security officer, which he called “the beginning of a major commitment to prepare our nation” in a statement. because of the risks this new technology presents. — Derek Robertson

A tidbit from the world of lobbying: Applied Intuition, a Silicon Valley startup that develops software for autonomous cars, has launched its own political action committee.

POLICY Impact reported in May about the company’s efforts to expand its footprint in D.C., including hiring lobbyists and a former aide to Rep. Marcy Kaptur (D-Ohio) to help with the company’s mission to “advance the deployment of safe and secure autonomy in the civilian and defense sectors.”

By taking the next step and launching the PAC, the group hopes to “accelerate the adoption of safe and intelligent machines.” The army’s robotic combat vehicle and Toyota’s autonomous car efforts — its hybrid defense/commercial business model is relatively unusual in the field. — Derek Robertson and Daniel Lippman

Contact the entire team: Ben Schrekinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

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CORRECTION: Yesterday’s newsletter misstated Ken Rogoff’s work history. His previous jobs include chief economist at the International Monetary Fund and economist at the Board of Governors of the Federal Reserve System.

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