Governments and central banks are urged by a Harvard research paper to add bitcoin to reserves in order to reduce "sanction risk."

Governments and central banks are urged by a Harvard research paper to add bitcoin to reserves in order to reduce “sanction risk.”

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Central banks in countries that face a risk of being sanctioned by the US could shift their international reserves to include bitcoin (BTC), a new Harvard University research paper has argued.

According to the research paper, the concept of central bank risk hedging with bitcoin is founded on the observation that numerous central banks, and in particular those that are exposed to a higher risk of US sanctions, have increased the proportion of their reserves that is comprised of gold, which is a traditional form of central bank reserve asset, in recent years.

According to the author, increasing the proportion of bitcoin held in reserve in addition to gold holdings would further strengthen these nations’ resistance to the effects of sanctions. According to the author’s argument, this is particularly relevant under circumstances in which the nation struggles to obtain sufficient quantities of physical gold.

Titled Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves, the newly published research paper is 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.

Ukraine war could make central banks more interested in Bitcoin

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

“[…] it is timely to explore the question of how, and to what extent, the risk of financial sanctions may motivate changes in 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 sanction hedge.

“Under a proof-of-work system, the ability to censor transactions on the blockchain requires achieving ‘majority hash power,’ meaning that the censor must control at least 51% of the computing power employed by all miners,” the paper said.

It added that achieving such a status is unfeasible “due to the sheer quantity of computing power dedicated to Bitcoin mining, as well as the amount of electricity required to power the mining chips.”

Harvard Research Paper Urges Governments and Central Banks to Add
Source: Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves/Matthew Ferranti

In conclusion, Ferranti admitted that no asset is “totally safe” in the presence of sanctions, but that cryptocurrencies like bitcoin can offer “some protection,” although the protection comes with higher volatility.

Compiled by Coinbold

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