A research paper published at Harvard University highlights how central banks can use Bitcoin (BTC) to protect themselves from financial sanctions from issuers of fiat reserves.
A working paper, titled “Hedging the risk of sanctions: cryptocurrency in the reserves of central banks”, Posted by Matthew Ferranti, a PhD candidate in the university’s economics department, explored the potential of Bitcoin as an alternative hedging asset for central banks to fight potential sanctions.
Ferranti argued that it makes sense for central banks to hold a small amount of Bitcoin even under normal circumstances. However, when there is a risk of sanctions, the researcher said that it makes sense to keep a larger portion of BTC alongside your gold reserves.
In the document, the researcher also noted that Countries that faced risks of sanctions from the United States have increased the proportion of their gold reserves much more than countries that had less risk of sanctions. If these central banks cannot acquire enough gold to cover sanctions risks, the researcher argued that Bitcoin reserves are an optimal alternative.
Apart from this, the researcher believes that the risk of sanctions may end up stimulating the diversification of central bank reserves, reinforcing the value of cryptocurrencies and gold. Ferranti concluded that there are significant benefits to diversifying reserves and allocating shares to both Bitcoin and gold.
Bank of America (BofA) digital strategists highlighted that the increasing correlation between BTC and gold is an indicator of investor confidence in Bitcoin during the current economic downturn. In addition, Bank of America strategists believe that the increase in self-custody also indicates a possible decrease in selling pressure.
While self-custody has started to come to the fore amid the FTX exchange crash, some members of the community argued that it is not without risk. From bugs in smart contracts to loved ones’ access to crypto assets after death, members of the community pointed out potential issues that could arise when people decide to self-custody their digital assets.
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