Harvard Paper to Central Banks: Buy Bitcoin!

With the help of 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 in bulk is somewhere between counterintuitive and far-fetched.

But after Western governments froze Russia’s foreign exchange reserves earlier this year, speculation mounted that some central banks would acquire cryptocurrency as a form of insurance against financial blockades by the US 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 goals and who see it as a good thing that crypto could offer a workaround.

Bitcoiners’ hopes often revolve around the Gulf States, with their vast cash reserves and often strained relations with the West. In August, a Twitter account Inspired by the possibility, Sheikh Roberto jumped up to promote the use of Bitcoin and slam the Fed in posts from El Salvador.

Last week we put this idea to a print test in talks with crypto entrepreneurs on the sidelines of the Milken Institute’s Middle East Summit in Abu Dhabi. There, We have received no indication that Gulf central banks are 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 graduate student at Harvard Economics and advisor to former Fed board governor Ken Rogoff, now a Harvard professor — has caused a bit of a stir.

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 when exposed to sanctions risk, although his analysis finds that gold is 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DFD met with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since it was first published online late last month.

What are the implications of your findings?

You can read comments, for example in the Wall Street Journal, where people say: “We have overused sanctions. It’s going to come back to bite us because people don’t want to use dollars.” But the contribution of my work is to quantify that and say, “Okay, how big is that really? How worried should we be about that?”

The numbers that come out of it are yes, it’s a problem. It’s not just about changing your Treasuries by 1 percent or so. It’s way bigger than that.

Instead of hedging sanctions risk with bitcoin, shouldn’t governments just avoid doing bad things?

There’s not just one thing that puts you on the US sanctions list.

For example, if the only thing that could get you sanctions was invading another country, then as long as most countries don’t plan to invade their neighbors, they probably don’t need to bother at all, and so my research becomes less relevant.

But it’s a pretty nebulous thing. That could cause countries to pause and reflect on the question, “How reliable is the US?”

The paper says nothing about whether the use of sanctions is good or bad. There is a vast body of literature on how effective sanctions are. And I think the number that comes out of that is about a third of the time they work. Of course, they can have unintended consequences, such as hurting the population of the country you are sanctioning.

We hear a lot about crypto and sanctions evasion, but from a central bank reserve perspective, you find gold to be a more useful hedge. Why?

Because it’s so much less volatile. It’s about 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 care about bitcoin?

They are uncorrelated. They’re both kind of jumping around, so there’s a diversification benefit to having both.

And if you can’t get enough gold to adequately hedge your sanctions exposure, think of a country with very poor infrastructure, unable to store large amounts of gold, or countries whose reserves are so large that they just can’t buy enough gold. Places like Singapore and China. You can’t just turn around and buy $100 billion in 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 Harvard economists who offer 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 contained herein. Change the number and run the thing again and you’ll get results tailored to your beliefs.

If you were advising the Treasury on its sanctions policy, what would you tell it?

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

What would you say to the President?

Try to give concreteness to the nebulousness of how we apply sanctions.

The White House made the announcement last Friday a nondescript looking memo this has major political implications.

In the letter, Shalanda D. Young, director of the Office of Management and Budget, provides guidance to federal agencies on how to comply with a Order from earlier this year who ordered them to “quantum-proof” their cryptographic systems. The guidance includes that agencies know they have until May next year to report their most vulnerable systems, that agencies should designate someone to lead such “cryptographic inventory” projects, and that each agency must produce an annual report as such up to Deadline 2035 for quantum-safe federal systems.

When that kind of bureaucratic attention to detail comes into play, you know the government means business. The memo also establishes a working group to help coordinate the decades-long quantum security project led by the Biden administration’s chief information security officer, Chris DeRusha, who in a statement described it as “the start of a major undertaking in preparation for our… Nation” labeled for the risks of this new technology.” — Derek Robertson

A treat from the lobby world: Applied Intuition, a Silicon Valley-based startup developing software for autonomous vehicles, has formed its own political action committee.

Political influence reported in May on the company’s efforts to expand its presence in DC, including hiring lobbyists and a former employee of Rep. Marcy Kaptur (D-Ohio) to assist in its mission to “enable the use of safe and trusted autonomy in civil and advance the defense sector”.

By taking the next step and introducing a PAC, the group hopes in a statement to “accelerate the adoption of safer and smarter machines” like the one Army Robotic Combat Vehicle and Toyota’s autonomous vehicle efforts — its hybrid defense/commercial business model is relatively uncommon in this space. — Derek Robertson and Daniel Lippman

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). follow us @DigitalFuture on twitter.

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

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