Harvard paper to central banks: Buy Bitcoin!


With help from Derek Robertson and Daniel Lippman

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DFD caught up with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial publication online late last month.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

Last Friday, the White House published an unassuming-looking memo that has big policy implications.

In the letter, Shalanda D. Young, director of the Office of Management and Budget, provides guidance to federal agencies for complying with an order from earlier this year that ordered them to “quantum-proof” their cryptographic systems. The guidance includes letting agencies know that they have until May of next year to report their most vulnerable systems, that agencies should designate someone to take the lead on such “cryptographic inventory” projects, and that each agency will be required to produce an annual report as such until the 2035 deadline for quantum-proofing federal systems.

When that kind of bureaucratic attention to detail comes into play, you know the government is serious. The memo also establishes a working group to help coordinate the decade-plus-long quantum-proofing project, headed by the Biden administration’s chief information security officer Chris DeRusha, who called it in a statement the “start of a major undertaking to prepare our Nation for the risks presented by this new technology.” — Derek Robertson

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

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

By taking the next step and launching a PAC, the group said in a statement, it hopes to “accelerate the adoption of safe and intelligent machines” like the Army’s Robotic Combat Vehicle and Toyota’s autonomous vehicle efforts — its hybrid defense/commercial business model being relatively unusual in the field. — 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 covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.

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