Harvard Research Paper Urges Governments and Central Banks to Add Bitcoin to Reserves to Hedge ‘Sanction Risk’

Harvard Research Paper Urges Governments and Central Banks to Add Bitcoin to Reserves to Hedge ‘Sanction Risk’

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Central banks in nations prone to being sanctioned by the US could shift their worldwide reserves to embrace bitcoin (BTC), a brand new Harvard University analysis paper has argued.

The analysis paper based mostly the concept of ​​central financial institution threat hedging with bitcoin on the truth that many central banks – and particularly these dealing with a larger threat of US sanctions – have in recent times diminished the share of their reserves held by gold,’ a conventional central financial institution reserve asset.

According to the creator, including a BTC allocation as well as to gold will additional enhance the resilience to sanctions for these nations. This is very true in instances the place the nation struggles to acquire sufficient bodily gold, the creator argued.

Titled Hedging Sanctions Risk: Cryptocurrency in Central Bank Reservesis the newly revealed analysis paper written by Matthew Ferranti, a PhD candidate in economics at Harvard University.

“The ability of fiat reserve issuers to freeze transactions, which constitutes a form of de facto default on the underlying obligations, calls into question fiat reserve currencies’ status as ‘safe haven’ assets,” Ferranti wrote.

War in Ukraine could make central banks extra all for Bitcoin

In the paper, Ferranti pointed to the freezing of Russia’s worldwide central financial institution reserves within the wake of the invasion of Ukraine for example of why this query is extra related now than ever.

“[…] it is timely to investigate the question of how, and to what extent, the risk of financial sanctions can motivate changes in the central bank reserve composition,” the PhD candidate noted in the paper.

Proof-of-work is censorship resistant

Ferranti also noted in his paper that bitcoin, as a proof-of-work-based digital asset, is particularly useful as a sanctions hedge.

“Under a proof-of-work system, the power to censor transactions on the blockchain requires reaching ‘majority hash energy,’ which means the censor a minimum of 51% of the computing energy utilized by all miners , should management,” the paper said.

It added that achieving such a status is unfeasible “due to the big quantity of computing energy devoted to Bitcoin mining, in addition to the quantity of electrical energy required to energy the mining chips.”

Source: Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves/Matthew Ferranti

Finally, Ferranti acknowledged that no asset is “utterly protected” in the presence of sanctions, but that cryptocurrencies such as bitcoin can offer “some safety,” though that safety comes with larger volatility.

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