A research paper published at Harvard University highlights how central banks can use Bitcoin (BTC) to hedge against financial sanctions from fiat reserve issuers.
A working paper titled “Sanctions Hedging Risk: Cryptocurrency in Central Bank Reserves,” published by Matthew Ferranti, a PhD student in the university’s economics department, explores bitcoin’s potential as an alternative hedging asset for central banks to combat potential sanctions.
Ferranti argues that there is merit in central banks holding a small amount of bitcoin even under normal circumstances. However, when there is a risk of sanctions, the researcher said it makes sense to hold a larger portion of BTC along with their gold reserves.
In the article, the researcher also pointed out that countries that faced the risk of sanctions from the United States increased the proportion of their gold reserves much more than countries that faced less risk of sanctions. If these central banks cannot acquire enough gold to hedge the risks of sanctions, the researcher argues that bitcoin reserves are the optimal alternative.
In addition, the researcher believes that the risk of sanctions could ultimately stimulate the diversification of central bank reserves, strengthening the value of crypto and gold. Ferranti concluded that there are significant benefits to diversifying reserves and allocating parts to both Bitcoin and gold.
Connected: Does Bitcoin Protect Against Inflation? Why BTC Didn’t Handle Peak Inflation Well
Digital strategists at Bank of America (BofA) highlighted that the rising correlation between BTC and gold is an indicator of investor confidence in Bitcoin during the current economic downturn. In addition, BofA strategists believe that the rise in self-custody also indicates a potential reduction in selling pressure.
While self-custody has started to come into focus amid the fall of the FTX exchange, some members of the community argue that it is not without its risks. From bugs within smart contracts to loved ones accessing crypto assets after death, community members pointed out potential problems that can arise when people take care of their digital assets themselves.