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Harvard Research Paper urges governments and central banks to add Bitcoin to reserves to hedge “sanctions risk.”

Source: Adobe/Coffee

Central banks in countries at risk of US sanctions could switch their international reserves to Bitcoin (BTC), argues a new research paper from Harvard University.

The research paper justified the idea of ​​central bank risk hedging with Bitcoin by stating that many central banks — and particularly those that are at greater risk from US sanctions — have traditionally increased the proportion of their gold reserves in recent years compared to central bank foreign exchange reserves.

According to the author, adding a BTC allocation in addition to gold would further increase sanctions resilience for these countries. This is especially true in cases where the country is struggling to acquire enough physical gold, the author argued.

The newly released research paper, titled Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves, was authored by Matthew Ferranti, a graduate student in economics at Harvard University.

“The ability of fiat reserve issuers to freeze transactions, representing a kind of de facto default on the underlying liabilities, challenges the status of fiat reserve currencies as ‘safe havens,'” Ferranti wrote.

The war in Ukraine could make central banks more interested in Bitcoin

In the paper, Ferranti pointed to the freezing of Russia’s international central bank reserves following the invasion of Ukraine as an example of why the issue is more relevant now than ever.

“[…] It is time to examine the question of how and to what extent the risk of financial sanctions can lead to changes in the composition of central bank reserves,” the doctoral student 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 regime, the ability to censor transactions on the blockchain requires the achievement of ‘majority hash power,’ meaning the censor must control at least 51% of the computing power used by all miners.” , says the newspaper.

It added that achieving such a status is not feasible “due to the sheer amount of computing power expended on bitcoin mining, as well as the amount of electricity required to run the mining chips.”

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

Finally, Ferranti acknowledged that no asset is “completely safe” in the presence of sanctions, but that cryptocurrencies like bitcoin may offer “some protection,” although the protection comes with higher volatility.

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