Harvard Paper to Central Banks: Buy Bitcoin!

With the help of Derek Robertson and Daniel Lippman

CAMBRIDGE, MASS.— Bitcoin was invented to get around the world’s central banks, so the idea that those banks would start buying Bitcoin wholesale ranks counterintuitive to far-fetched.

But after Western governments froze Russia’s foreign exchange reserves earlier this year, speculation has risen that some central banks may have acquired the cryptocurrency as a form of insurance against financial blockades by the United States and its allies. .

In the months that followed, there was little more than 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 cryptocurrencies could provide an alternative solution.

The hopes of Bitcoiners often revolve around the Gulf states, with their huge cash reserves and often difficult relations with the West. In August the a Twitter account inspired by the possibility, Sheikh Roberto, popped 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 on the sidelines of the Milken Institute’s Middle East Summit in Abu Dhabi. There, we saw no indication that central banks in the Gulf states were considering buying Bitcoin, despite their interest in blockchain technology.

But elsewhere the idea is very much alive, at least in theory. A new worksheet on the subject of Matthew Ferranti — a fifth-year graduate student in Harvard’s economics department and adviser to Ken Rogoff, a former IMF and Federal Reserve Board of Governors economist who is now a Harvard professor — caused a small blow.

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, even though 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 hasn’t been peer-reviewed since it was first posted online late last month.

What are the implications of your findings?

You can read editorials, for example in the Wall Street Journal, where people say: “We have abused the sanctions. It will come back to bite us because people won’t want to use dollars. But the contribution of my article is to put a number on that and say, “Okay, how important is this deal really? How much should we care?

The numbers that come out are that yes, it is a concern. It’s not just that you change your treasuries by 1 percent or something. It’s much bigger than that.

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

There’s not just one thing that gets you added to the US sanctions list.

If the only thing that might get you sanctioned, for example, is invading another country, then most countries, as long as they don’t plan to invade their neighbors, probably don’t have to worry about that at all, and so my research becomes less relevant.

But that’s pretty nebulous. This might make countries think and think, “How trustworthy is the United States?”

The document says nothing about whether the application of sanctions is a good thing or a bad thing. There is a huge literature on the effectiveness of sanctions. And I think the number from that is about a third of the time they work. Of course, they can have unforeseen consequences, like hurting the population of the country you’re sanctioning.

We hear a lot about crypto evasion and sanctions, but from a central bank reserves perspective, it turns out that gold is a more useful hedge. How come?

Because it is 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 should a central bank care about Bitcoin?

They are not related. They both hop around, so there’s a diversification benefit to having both.

And if you can’t get enough gold to adequately cover your sanctions risks – think of a country that has very poor infrastructure, doesn’t have the capacity to store 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 worth of gold.

Based on that of Russia disastrous experience with privatization in the 1990s, some would say the lesson of recent history for non-Western countries is, “Beware of Harvard economists giving 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 made therein. Change the number and rerun the thing and you’ll get personalized results based on 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 important that it should be made by the president.

What would you say to the president?

Try to give substance to the nebulosity of how we apply sanctions.

On Friday, the White House released a unassuming looking reminders which has major 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 this year which ordered them to “quantum-proof” their cryptographic systems. The guidance includes letting agencies know that they have until May next year to report their most vulnerable systems, that agencies should designate someone to take the lead on such “crypto inventory” projects, and that each agency will be required to produce an annual report as such until Expires 2035 for quantum-proof federal systems.

When that kind of bureaucratic attention to detail comes into play, you know the government means business. The memorandum also establishes a working group to help coordinate the decade-long quantum verification project, led by Biden administration information security chief Chris DeRusha, who called it in a statement “the beginning of a major undertaking for prepare our nation for the risks presented by this new technology.” — Derek Robertson

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

POLITICIAN Influence reported in May on the company’s efforts to expand its presence in Washington, including hiring lobbyists and a former aide to Rep. Marcy Kaptur (D-Ohio) to help with its mission to “promote the deployment of secure and trusted autonomy in the civil and defense sectors”.

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

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 @Digital Future on Twitter.

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

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FIX: Yesterday’s newsletter incorrectly described Ken Rogoff’s employment history. His previous work includes stints as chief economist for the International Monetary Fund and as an economist for the Federal Reserve Board of Governors.

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