A new working paper by Matthew Ferranti — a fifth-year PhD candidate in Harvard’s economics department and advisee of Ken Rogoff, a former economist at the IMF and the Federal Reserve Board of Governors who is now a Harvard professor — has caused a minor splash. From a report: In it, Ferranti argues that it makes sense for many central banks to hold a small amount of Bitcoin under normal circumstances, and much more Bitcoin if they face sanctions risks, though his analysis finds gold is a more useful sanctions hedge. DFD caught up with Ferranti at Harvard’s Cabot Science Library to discuss the working paper, which has not been peer-reviewed since its initial publication online late last month.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 findings?
You can read op-eds, for example in the Wall Street Journal, where people say, “We overused sanctions. It’s going to come back to bite us because people are not going to want to use dollars.” But the contribution of my paper is to put a number on that and say, “Okay, how big of a deal is this really? How much should we be concerned about it?” The numbers that come out of it are that yeah, it is a concern. It’s not just you change your Treasury bonds by 1 percent or something. It’s a lot bigger than that.
Rather than hedging sanctions risk with Bitcoin, shouldn’t governments just avoid doing bad things?
There’s not just one thing that gets you added to the U.S. sanctions list. If the only thing that could get you sanctioned, for example, was to invade another country, then most countries, as long as they don’t plan to invade their neighbors, probably don’t need to care about this at all, and so my research becomes less relevant. But it’s kind of a nebulous thing. That might make countries pause and think about, “How reliable is the U.S?” The paper doesn’t say anything about whether applying sanctions is a good or bad thing. There’s a huge literature on how effective sanctions are. And I think the number that comes out of that is like a third of the time they work. Of course, they can have unintended consequences, like hurting the population of the country that you’re sanctioning.
So why would a central bank bother with Bitcoin?
They’re not correlated. They both sort of jump around, so there’s diversification benefit to having both. And if you can’t get enough gold to hedge your sanctions risk adequately — think about a country that has very poor infrastructure, doesn’t have the capability to store large amounts of gold, or countries whose reserves are so large that they simply cannot buy enough gold. Places like Singapore and China. You can’t just turn around and buy $100 billion of gold.