Harvard Paper to Central Banks: Buy Bitcoin!

Harvard Paper to Central Banks: Buy Bitcoin!

With help from Derek Robertson and Daniel Lippman

CAMBRIDGE, MASS.– Bitcoin was invented to bypass the central banks of the world, so the idea that these banks would start buying Bitcoin in bulk is somewhere between counter-intuitive and far-fetched.

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

In the months that followed, it remained only speculation. But the idea has remained a fixation among bitcoin investors, who tend not to support US foreign policy goals, and who see it as a good thing that crypto can provide a workaround.

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

Last week we tested this idea under pressure in conversations with crypto entrepreneurs on the sidelines of the Milken Institute’s Middle East Summit in Abu Dhabi. The, we found no evidence that central banks in the Gulf States were considering Bitcoin purchases, despite their interest in blockchain technology.

But elsewhere, the idea is alive and well, at least in theory. A new work document on the subject by Matthew Ferranti — a fifth-year doctoral student in Harvard’s economics department and adviser to former Fed board governor Ken Rogoff, now a Harvard professor — caused 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 a lot more Bitcoin if they face sanctions risks, although his analysis reveals that the 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DFD met with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since it was first posted online late last month.

What are the implications of your findings?

You can read opinion pieces, for example in the Wall Street Journal, where people say, “We abused the sanctions. It will come back to bite us because people will not want to use the money. But the contribution of my article is to put a number on that and say, “Okay, how much of a problem is that really?” How much should we care about it? »

The figures that come out indicate that yes, it is a concern. It’s not just that you change your treasuries by 1% or something like that. It’s much bigger than that.

Rather than hedging the risk of sanctions with Bitcoin, shouldn’t governments just avoid doing bad things?

There isn’t just one thing that gets you on the US sanctions list.

If the only thing that could get you punished, for example, was invading another country, then most countries, as long as they don’t plan to invade their neighbors, probably don’t need to get away with it. care at all, and therefore my searches become less relevant.

But it’s a bit nebulous. This could cause countries to stop and ask, “How reliable is the United States? »

The document is silent on whether the application of sanctions is a good thing or a bad thing. There is a large literature on the effectiveness of sanctions. And I think the number that comes out is like a third of the time they work. Of course, they can have unintended consequences, like hurting the population of the country you are sanctioning.

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

Because it’s 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 are not correlated. They both kind of jump around, so there’s a diversification benefit to having both.

And if you can’t get enough gold to adequately cover your sanctions risk – think of a country that has very poor infrastructure, lacks the capacity to store large amounts of gold, or countries whose the 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 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: “Beware of Harvard economists who give advice”. Should people trust your findings?

[Laughs] This is a framework for reflection on this subject. You may or may not agree with the assumptions incorporated therein. Change the number and rerun the thing and you’ll get results personalized to your beliefs.

If you were advising the Treasury Department on its sanctions policy, what would you say?

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

What would you say to the president?

Try to put some concreteness on the nebula of the way we apply the sanctions.

Last Friday, the White House released a unassuming memo which has great political implications.

In the letter, Shalanda D. Young, director of the Office of Management and Budget, provides guidance for federal agencies to comply with a order from the beginning of the year who ordered them to “quantum protect” their cryptographic systems. The guidelines include letting agencies know they have until May next year to flag their most vulnerable systems, that agencies should appoint someone to take the lead on these “crypto inventory” projects. and that each agency will be required to produce an annual report. as such until deadline 2035 for quantum proof federal systems.

When that kind of bureaucratic attention to detail kicks in, you know the government means business. The memo also establishes a task force to help coordinate the decade-plus Quantum Protection Project, led by Biden administration information security chief Chris DeRusha, who called it in. a statement of “beginning of a major undertaking to prepare our nation”. for the risks presented by this new technology. — Derek Robertson

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

Political influence reported in May on the company’s efforts to expand its footprint in DC, including hiring lobbyists and a former aide to Rep. Marcy Kaptur (D-Ohio) to help it in its mission to “advance the deployment of a self-reliance safe and reliable in the civil and defense sectors”.

By taking the next step and launching a PAC, the group said in a statement that it hopes to “accelerate the adoption of safe and smart machines” like the Army robotic combat vehicle and Toyota’s Self-Driving Efforts — its hybrid defence/commercial business model being relatively unusual in the field. — Derek Robertson and Daniel Lippman

Stay in touch with the whole team: Ben Schrecker ([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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