Using cryptos as leverage against sanctions
An academic paper written by a Harvard economics researcher has suggested that buying Bitcoin could protect countries against economic sanctions, such as those that have been leveled against Russia in the aftermath of its campaign against Ukraine.
In his paper titled “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” Matthew Ferranti, a Ph.D. candidate in Harvard’s economics department contends that the economic sanctions that western countries have levied against Russia have been unprecedented in their scope.
As a result, Ferranti believes US Treasuries or AAA-rated Euro bonds, seen as safe havens for a long time, can no longer be seen in the same light. Instead, he presents evidence to suggest that central banks can use cryptos in general, and Bitcoin in particular, to hedge against financial sanctions.
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The paper hasn’t yet been peer-reviewed, but it can’t be ignored given the fact that among those who Ferranti thanked for providing comments to the paper is Kenneth Rogoff, the Harvard professor who has served as an economist at the International Monetary Fund (IMF).
“Decentralized cryptocurrencies are resistant to governmental financial sanctions,” writes Ferranti, adding that while sanctioned individuals may not be able to use large sanction-respecting crypto exchanges, as long as the issuers of fiat currency do not control the blockchain itself, sanctioned individuals can continue to send cryptos from one wallet to another.
The paper agrees that Gold has traditionally been the reserve asset of choice and does an equally good job of protecting against sanctions. In fact, Ferranti points out that countries that were facing risks of sanctions from the US, such as the ones that import valuable military equipment from its geopolitical rivals, have been increasing the share of their gold reserves at a faster pace than countries that had less sanction risk, between 2016 and 2021.
That said, the researcher insists it isn’t always feasible to accumulate large reserves of the metal given the logistical and security costs involved. He then goes on to present evidence to not just pitch Bitcoin as an optimal alternative, but also demonstrate the significant benefits of diversifying reserves between the precious metal and cryptos.
All things considered, Ferranti concludes that while cryptos could be used as leverage against sanctions, they do come with their shortcomings, high price volatility being the chief among them. “Indeed, in the presence of sanctions, there is no totally safe asset,” the researcher concluded, as he recommends further research on the subject.