A new working paper from Harvard University has expressed support for the idea that central banks should buy Bitcoin (quotation BTC) as a reserve asset. The document's author, Matthew Ferranti, argues that it makes sense for countries to hold small amounts of Bitcoin to diversify the composition of their central bank reserves.
In the paper, titled “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” the Harvard Economics Department graduate student said the issue is pertinent because asset status haven of fiat reserve currencies is losing credibility.
He added that this is especially true with the growing number of sanctions cases in which issuers of fiat reserve currencies, such as the United States and its allies, freeze transactions through sanctions that cause a de facto default on the underlying bond. In the document the author writes that:
The ability of reserve currency issuers to freeze transactions, which constitutes a form of de facto default on the underlying obligations, challenges the safe-haven status of reserve currencies.
In an interview with the Politico news agency, he explained that adding BTC to central bank reserves would help countries adequately hedge the risk of sanctions. He pointed out that BTC is much easier to use as a sanctions hedge than gold, which many consider the ideal safe-haven asset as it is less volatile than cryptocurrencies.
And if you can't get enough gold to adequately cover the risk of sanctions, think of a country that has very poor infrastructure, doesn't have the capacity to store large amounts of gold, or countries whose reserves are so large that they simply can't they can buy enough gold. Countries like Singapore and China. You can't just go around and buy $100 billion of gold.
Central banks are still focused on CBDCs
While the paper has not yet been peer-reviewed, the academic community and policymakers are not likely to dismiss it, considering Ferranti's story. Ferranti is an adviser to Kenneth Rogoff, the Harvard professor who was chief economist at the International Monetary Fund (IMF).
Currently, only El Salvador, which made Bitcoin legal tender last year, has added the cryptocurrency to its central bank reserve. Their move has been met with mixed reviews: according to a report by Bloomberg, the country has seen its holdings of Bitcoin fall to less than 60% of the value at which they were purchased.
Meanwhile, most of the central bank adoption of blockchain technology has focused on the introduction of central bank digital currencies (CBDCs). According to CBDC Tracker data, more than 100 central banks are in various stages of CBDC development.
