Just as plummeting values and an infectious scandal have darkened the sky for cryptocurrency advocates, here comes a ray of sunlight — from Harvard University, of all places, the temple of the established economic order.
Granted, it’s from a Ph.D. candidate and not a full-time professor, and it’s a recipe for the world’s rogue nations to somehow evade accountability, but still. In 20 years we could look back at 2022 as the year when crypto got its first toe-hold of legitimacy from fiat currency’s old guard. It’s certainly the first suggestion from a place like Harvard that countries owning a little bit of Bitcoin
Matthew Ferranti, a Ph.D. candidate in economics, published a paper this month that says nations in danger of international sanctions could lessen the impact by squirreling away some cryptocurrency like Bitcoin.
The article, Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves, can hardly be slammed as an off-the-wall think piece from a starry-eyed student. Kenneth Rogoff, the Harvard professor who was once chief economist at the International Monetary Fund, is listed among those who provided feedback.“I think if I wrote this before the Russia sanctions, the academic community would have questioned the usefulness of this model,” Ferranti told Forbes. “Now with what happened to Russia, people have started to think about, yeah ok, this is something that can actually happen and it’s a risk we ought to be thinking about.”
Ferranti concludes that the economic sanctions that Western countries have levied against Russia have forever changed the calculus for central banks. As a result, U.S. Treasuries, for a long time seen as a safe haven even by America’s enemies, can no longer be characterized as sacrosanct.
“It’s a very open question about what the fundamental value of Bitcoin is,” Ferranti told Forbes. “Economists are still struggling with this. My paper tries to ascribe some value to Bitcoin as a hedge against the risk of sanctions. I wanted to see how Bitcoin stacks up against reserve currencies when you account for Bitcoin’s volatility and the risk of sanctions on traditional reserve assets.”
The idea that everyone, including central banks, might want to own Bitcoin “in case it catches on” is hardly new. But Ferranti is the first to quantify how central banks could size their crypto investments.
The obvious alternative is gold. However, obtaining physical gold presents its own set of challenges.
Buying gold takes time that a country under threat of sanctions might not have, and taking physical possession of it can be thwarted.
“For countries with a high risk of sanctions, the optimal Bitcoin share, according to the model, depends heavily on whether the country can acquire enough physical gold to hedge its sanctions risk,” Ferranti told Forbes. “If it can, then the optimal Bitcoin percentage is generally in the single digits. If not, for example if the central bank doesn’t have the necessary infrastructure to store or secure very large quantities of gold, then the optimal Bitcoin share can be in the double digits, in which case Bitcoin acts as an imperfect substitute for gold.”
To be sure, El Salvador has already taken the leap, albeit not because of the threat of sanctions.
The country’s digital dalliance hasn’t gone off without a hitch. The Central American country spent more than $100 million purchasing Bitcoin for its treasury. Those coins are now worth about half of what El Salvador paid, leading to the inevitable backlash.
Still, Ferranti’s model shows that Bitcoin, or other cryptocurrencies, could be viewed as a viable insurance policy against sanctions even when accounting for their face-ripping price volatility.
That said, Ferranti doesn’t think every country should be hodling crypto just yet.
“For countries that aren’t really concerned about U.S. sanctions at all,” Ferranti says, “there probably isn’t a reason for them to think about Bitcoin reserves unless we see its volatility come down.”