A paper published by a Ph.D. student at Harvard University suggests central banks and governments use Bitcoin in their reserve as a way to circumnavigate sanctions. 

The working title of the paper is  “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” released by an economy student, Matthew Ferranti at the university, he explained the potential of bitcoin to be used as an alternative hedging asset for governments and central banks to defend themselves from potential sanctions.

At present, only El Salvador has made Bitcoin their national currency, however, many other sanctioned countries are yet to take bold decisions toward it. Cryptocurrency enthusiasts look at the Gulf countries with the hope to add Bitcoin to their balance sheets.

Even in normal circumstances, banks must hold a small amount of Bitcoin along with their gold reserves, if there will be a risk of sanction this step can be proven as a merit in the new future, suggests the researcher.

The researcher also opined in his paper that countries growing their gold reserve shares that facing risks of sanctions from the United States more than the countries that have less sanction risk. 

In recent times, As things escalated when Russia invaded Ukraine, the use of digital assets to evade sanctions has remained a hot topic. Russia has been slammed with economic and financial sanctions by many western nations, which may shrink the country’s economy by up to 6% as pointed out by many experts.

Just after that, the Finance Minister of Russia and their central bank committed to using virtual currencies for their cross-border payments.

Although, the researcher also pointed of the biggest block in using the asset class to circumvent sanctions is the centralization in the digital asset industry. Binance and Gemini were asked by the U.S. law enforcement agencies to inform and transactions involving sanctioned individuals or entities from Russia.

Ferranti’s paper states countries that are sanctioned are putting their trust in gold instead of using Bitcoin. He also pointed out that more Gulf countries are now having gold in their reserve but he opined that “you can’t just turn around and buy $100 billion of gold”, so some countries might accumulate gold.

A perfect combination, according to Ferranti, is to have both assets for the benefit of diversification. Ferranti also shared his personal viewpoint on volatility of both assets, he said that he prefers central banks stacking up gold  instead of Bitcoin “because it is five times less volatile.”

In a closing statement, he said, “I conclude that sanctions risk may diminish the appeal of US Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of both cryptocurrency and gold.”

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