A new paper by Matthew Ferranti — a fifth-year PhD candidate in Harvard’s economics department and mentor to Ken Rogoff, a former economist at the IMF and Federal Reserve Board of Governors who is now a professor at Harvard — caused a minor splash from a report: In it, Ferranti argues that many central banks would hold small amounts of bitcoins under normal circumstances and many more bitcoins if they face the risk of sanctions, although his analysis shows that gold is a more effective sanctions hedge. DFD met with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial publication online late last month.
What are the implications of your search?
You can read op-eds, for example in the Wall Street Journal, where people say, “We’ve overused sanctions. It’s going to come back to bite us because people don’t want to use dollars.” But the contribution of my paper is to put a number on it and say, “Okay, how big of a deal is this really? How concerned should we be about this?” The numbers that come out of this are yes, it is a concern. It’s not just you changing your Treasury bonds by 1 percent or something. It’s much bigger than that.
Instead of hedging the risk of sanctions with Bitcoin, shouldn’t governments just avoid doing bad things?
Not just one thing gets you on the US sanctions list. If the only thing that gets you approved is, for example, invading another country, then most countries, unless they plan to invade their neighbors, probably don’t need to worry about it at all, and so my research becomes less relevant. . But it’s kind of a nebulous thing. It can make countries stop and wonder, “How reliable is the United States?” The paper doesn’t say anything about whether enforcing sanctions is a good or bad thing. There is a vast literature on how effective sanctions are. And I think the number that comes out is like a third of the time they work. Of course, they can have unintended consequences, such as hurting the population of the country you’re sanctioning.
So why would a central bank bother with Bitcoin?
They are not correlated. They both sort of jump around, so having both has diversity benefits. And if you don’t have enough gold to adequately hedge your sanctions risk – think about a country that has very poor infrastructure, doesn’t have the capacity to store large amounts of gold, or countries that have so many reserves that they simply can’t buy enough gold. Places like Singapore and China. You can’t just go around and buy $100 billion in gold.