Harvard Central Banking Paper: Buy Bitcoin!

With assistance from Derek Robertson and Daniel Lippman

Cambridge, Mass.Bitcoin was invented to circumvent the central banks of the world, so the idea of ​​these banks starting buying Bitcoin in large quantities is somewhere from unexpected 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 a financial blockade from the United States and its allies.

In the months that followed, it remained little more than speculation. But the idea has stuck around among Bitcoin investors, who tend not to support US foreign policy goals, and who see it as something good that crypto can provide.

Bitcoiners’ hopes often revolve around the Gulf countries, With its huge cash reserves and often fraught relations with the West. In August, A.J Twitter account Inspired by this prospect, Elder Roberto sprang up promoting the use of bitcoin and criticizing the Federal Reserve in publications 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 got no hint that central banks in the Gulf countries were considering buying Bitcoin, despite their interest in blockchain technology.

But the idea is alive elsewhere, at least in theory. new Worksheet On the subject by Matthew Ferrante — a fifth-year PhD candidate in the Harvard Economics Department and advisor to former Federal Reserve Governor Ken Rogoff, now a Harvard professor — caused a slight stir.

In it, Ferrante argues that it makes sense for many central banks to hold a small amount of bitcoin under normal circumstances, and more bitcoins if they run the risk of sanctions, though his analysis finds gold to be a more useful hedge than sanctions.

DFD met with Ferranti at Harvard University’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial online publication late last month.

What are the implications for your results?

You can read opinion pieces, for example in the Wall Street Journal, where people say, “We overused sanctions. It will come back to bite us because people won’t want to use dollars.” But the contribution of my paper is to put a number on that and say, “Well, how big of a deal is this really? How concerned should we be about that?”

The numbers coming out of it are that yes, it’s a concern. It’s not just about changing your Treasuries 1 percent or something. It is much, much larger than that.

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

There is not just one thing that will add you to the US sanctions list.

If, say, the only thing you can be punished for is invading another country, then most countries, so long as they do not plan to invade their neighbours, probably need not concern themselves with this at all, and so my research becomes less important.

But it’s a bit of a mystery. This might make countries pause and think, “How reliable is the United States?”

The newspaper did not say anything about whether the implementation of the sanctions was a good or bad thing. There is a huge literature on the effectiveness of sanctions. And I think the number that comes out of that is like a third of the time that they’re working. Of course, it can have unintended consequences, such as harming the population of the country you are sanctioning.

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

Because it is much 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 care about bitcoin?

They are not related. Both are a bit of a jump starter, so there is a diversification benefit in having both.

And if you can’t get enough gold to adequately hedge your sanctions risk – think of a country with very poor infrastructure, or that don’t have the capacity to stockpile large amounts of gold, or countries whose reserves are so large that they simply 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 Disastrous experience With privatization in the 1990s, some would say the lesson from the recent history of non-Western countries is, “Beware of the Harvard economists who carry advice.” Should people trust your results?

[Laughs] This is a framework for thinking about this topic. You may or may not agree with the assumptions contained therein. Change the number, restart the thing, and you’ll get results tailored to your beliefs.

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

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

What will you tell the president?

Try to concrete up the ambiguity of how sanctions are applied.

Last Friday, the White House posted a A modest looking note Which has major political implications.

In the letter, Chalanda de Young, director of the Office of Management and Budget, provides guidance for federal agencies for compliance Request from early this year Which instructed them to “quantum proof” their encrypted systems. The directive includes letting agencies know that they have until May next year to report on their most vulnerable systems, that agencies should designate someone to take the lead on “crypto inventory” projects, and that each agency will be required to produce an annual report like this until 2035 deadline For punch-resistant federal systems.

When that kind of bureaucratic attention to detail shows, you know the government is serious. The memorandum also creates a working group to help coordinate the decade-long Quantitative Audit project, chaired by the Biden administration’s chief information security officer, Chris DeRocha, which he described in a statement as “the beginning of a major undertaking to prepare our nation” for the risks posed by this new technology. Derek Robertson

A tale from the world of the lobby: Applied Intuition, a Silicon Valley-based startup developing software for self-driving vehicles, has launched its own political action committee.

political influence reported in May on the company’s efforts to expand its presence in D.C., including hiring lobbyist and former aide to Rep. Marcy Kaptur (D-Ohio) to assist in its mission to “advance the deployment of safe and trusted independence in the civil and defense sectors.”

By taking the next step and launching the PAC, the group said in a statement that it hopes to “accelerate the adoption of safe and intelligent machines” such as Army robot fighting vehicle And the Toyota’s autonomous vehicle efforts Its hybrid defense/commercial business model is relatively unusual in the field. – Derek Robertson and Daniel Lippman

Stay in touch with the whole team: Ben Schrekinger ([email protected]); Derek Robertson ([email protected]); Steve Houser ([email protected]); And the Benton Ives ([email protected]). Follow us @tweet on Twitter.

Ben Schreckinger covers technology, finance, and politics for POLITICO; He is an investor in cryptocurrencies.

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