Have You SEEN This!? Harvard Study on Bitcoin & Sanctions!

Last month Harvard University published A research paper arguing That central Banks should start buying Bitcoin to Protect themselves against sanctions This sounds crazy until you remember That sanctioned countries like Russia Have announced their intentions to adopt Cryptocurrency and some such as Iran are Reportedly using it already That's why today I'm going to summarize Harvard's recent paper explain what it Says in simple terms and tell you why Central banks might be on the brink of Accumulating BTC Foreign Paper I'll be summarizing today was Written by Matthew ferenti an economics PhD student at Harvard the paper is Titled quote hedging sanctions risk Cryptocurrency in Central Bank Reserves And I'll leave a link to the full text In the description if you're interested I'll also quickly note that Matthew Appears to have written the research Paper because he's looking for a job That's because the research paper is Actually a job market paper and Matthew's Google profile notes he will Be looking for work after he graduates In May next year let's hope he gets a Job in crypto Now the paper begins with a brief Introduction wherein Matthew gives Examples of countries accumulating or

Using BTC this list includes El Salvador And the Central African Republic both of Which made Bitcoin legal tender and Ukraine which received BTC donations Following Russia's invasion Matthew goes on to recount how half of The international reserves of the Russian Central Bank were frozen Following the country's invasion of Ukraine he points out that this sent a Warning to central banks around the World that Fiat currencies and cash Equivalents like sovereign debt are not Safe assets Matthew explains that he used a complex Economic model to simulate how sanctions Could lead to the accumulation of BTC by Central banks Matthew notes that this Seems to be the first research paper Which analyzes the change in Central Bank Reserves in response to sanctions Nice In the second part of the paper Matthew Provides a brief history of economic Sanctions he explains that sanctions Have started becoming more common as the Financial system has become centralized This centralization is due to Digitization both of which will only Increase as Central Bank digital Currencies or cbdcs are rolled out more About those in the description Matthew digs into the details of U.S Sanctions specifically those that come

From the U.S treasury Department's Office of foreign assets control or ofac Sanctions issued by ofak basically ban All U.S individuals and institutions From interacting directly or indirectly With any sanctioned entity Matthew reveals that the U.S has Sanctioned almost 9 000 entities to put Things into perspective the European Union has sanctioned just over 2 000 Entities and the United Nations has Sanctioned just over one thousand this Just goes to show you how trigger-happy The U.S has been when using money as a Weapon Not surprisingly research suggests that Sanctions have become significantly less Effective over the last 30 years with Only 30 percent of sanctions policy Objectives being achieved these policy Objectives typically involve human Rights and democracy a term that's Become synonymous with U.S imperialism To many now regarding sanctions against Central banks Matthew notes that there Are seven which are or have been Sanctioned by the United States These are the central banks of Russia Iran Syria North Korea Venezuela Afghanistan and Iraq Matthew adds that There is no expiration date for Sanctions now because sanctions against These central banks were introduced for A wide variety of reasons Matthew

Asserts that no Central Bank can be sure That it won't suddenly find itself on The wrong end of U.S sanctions this Calls for the accumulation of truly safe Haven assets to hedge against this risk In the third part of the paper Matthew Talks about one of the most popular Non-currency assets on central bank Balance sheets which is of course gold He points out that it's essentially Impossible for the U.S or its allies to Seize physical gold being held at the Central Bank of a sanctioned country Matthew speculates that this is the Primary reason why central banks Continue to hold gold He also seems to suggest that another Reason has to do with concerns with the Financial system that's because Central Bank gold reserves have been on the rise Since the 2008 financial crisis reaching 14.4 percent in 2020. as you can see Most of the gold held by central banks Is only held by a handful of them Matthew points to research which shows There is a correlation between the Central bank's gold Holdings and the Power of its Associated country the more Powerful a country the more gold its Central Bank tends to hold go figure To assess whether the central banks are Accumulating gold because of sanctions Risks Matthew examined data related to Military imports and exports for its

Associated country logically countries Which import their weapons from Russia Rather than the USA are probably most Concerned about sanctions now what you See here is the correlation between Central bank gold reserves and whether Their respective countries are buying Weapons from Russia and China or from The United States There appears to be a slight positive Correlation and Matthew's maths suggests This correlation is statistically Significant and it's quite some maths I Should add for example quote I compute standard errors using the Heteroskedasticity robust ICA Huber White estimator if anyone out there Knows what the hell that means please do Let me know in the comments anyways in The fourth part of the paper Matthew Covers cryptocurrency after explaining How cryptocurrencies work Matthew Accurately states that so long as a Centralized entity doesn't control a Cryptocurrency's blockchain then there Will always be a way to evade sanctions Using its coin or token Matthew goes on To explain how the only way to censor Transactions on proof of work Blockchains is to acquire and sustain 51 Of the computing power AKA hash rate he Notes that the only time a Bitcoin Mining pool achieved more than 50 of Bitcoin's hash rate was in 2014 and this

Has not happened since Matthew implies that executing a 51 Attack on Bitcoin today is practically Impossible due to how large the network Has grown However he does note that there have Been cases of individual Bitcoin miners Complying with U.S sanctions in the past And gives Marathon digital as an example For those who don't know Marathon Digital temporarily stopped including Transactions coming from sanctioned Bitcoin wallet addresses in May last Year the Bitcoin miner went back to Business as usual one month later after All the backlash from the crypto Community When it comes to proof-of-state Cryptocurrencies like ethereum Matthew Acknowledges that it would be easier to Censor transactions on their blockchains Given that all that's required is to buy Up most of the stake I'm surprised he Didn't mention how almost 70 percent of Ethereum blocks are now ofac compliant In any case Matthew believes that Ethereum will face Fierce competition as Staking eth doesn't require quote Meaningful real-world expenditure of Resources you should know that Matthew Is not a Bitcoin Maxi a footnote on the First page of the report suggests that He doesn't actually hold any crypto Speaking of which the first appendix of

The paper explains why stable coins are Not suitable for sanctions evasion the Tldr there is that they're centrally Controlled and their issuers have Frozen Token Holdings before most decentralized Stable coins are also backed by Centralized stable coins looking at you Die now if you need more evidence that Matthew isn't a maxi he claims that Bitcoin mining is bad for the Environment because it uses 0.5 percent Of the world's total energy according to Cambridge University he says Environmental and energy use issues Won't be of concern to countries evading Sanctions I reckon it's of no concern to Anyone once you know the facts and you Can get those using the link in the Description anywho in the fifth and Sixth parts of the paper Matthew talks About how he calculates btc's future Price he gives a nod to btc's insane Price action since its Inception and Correctly points out that BTC will Provide diminishing return turns in Percentage terms as it becomes more Mainstream Matthew also accounts for Things like the BTC in circulation the New BCC being created with each new Bitcoin block BTC trading volume Economic growth stock market growth and Even estimated yields on government debt In his BTC price Model most of what he Says here honestly flew over my head

Now the output of Matthew's complex Economic modeling can be seen here what You're looking at is the average Three-month return on BTC going forward Which seems to Cluster between 10 and 20 Percent in other words Returns on BTC Will average between 10 and 20 percent Per quarter for the foreseeable future Crypto bear markets notwithstanding this Ties into the seventh part of the paper Which pertains to the portfolio choices Of central banks Michael points out that Central banks assess the performance of Their portfolios every quarter he also Admits that some central banks structure Their portfolios to protect a currency Peg rather than profits Michael then Goes on to make a series of economic Assumptions related to sanctions these Include assertions that sanctions don't Affect the gold or cryptocurrency Reserves of a central bank and that the Stocks of companies in a sanctioned Country will fall significantly in Response to said sanctions Michael starts by estimating how much BTC central banks will start to hold in The future without any sanctions his Ever so complex modeling suggests that Two to three percent of Central Bank Portfolios will be in BTC interestingly His model also suggests that central Banks will simultaneously reduce their Gold Holdings obviously Central Bank

Portfolios look a lot different with Sanctions enabled with lots of gold and BTC accumulation Michael's model suggests that central Banks facing sanctions risks will hold At least five percent of their Portfolios in BTC and apparently up to 50 in Gold Michael concedes that such a Large gold allocation will be Unrealistic for most central banks Mostly due to the difficulty of Acquiring and securing such large Amounts of the stuff As such Michael presents a third model Where sanctioned central banks prefer BTC over gold for these reasons in this Third model BTC Holdings of central Banks could be as high as 40 percent of Their portfolios when facing at very High risk of sanctions I reckon this Will be the case for countries like North Korea whose hacking groups have Been financing the country's military Expansion using stolen cryptocurrency Naturally Michael runs a fourth model With the alternative assumption that Sanctioned central banks will prefer Gold to BTC if I understand correctly This fourth model suggests the same as The first one with sanctions enabled That's because in this model Central Bank portfolios are six percent BTC and 20 to 60 percent in gold now if all this Sounds ridiculous to you consider that

Most central banks have already been Moving away from the USD and other US Dollar assets for years and loading up On Alternatives this is a according to The international monetary fund or IMF And it sets the stage for some serious BTC adoption more about that paper in The description anyhow The eighth and final section of the Paper is the conclusion Michael Reiterates that no Central Bank can be Certain that the US the EU or some other Entity won't sanction their country and Seize their assets He also stresses that in truth there is No safe asset when sanctions are truly Severe even so gold and cryptocurrency Are the best assets for central banks to Hold under such circumstances each comes With its trade-offs with gold being Internationally recognized but difficult To buy sell and store and BTC being very Liquid but being extremely volatile and All BTC transactions being public Michael says that much more research is Needed especially when it comes to Simulating how Central Bank portfolios Will change over time with and without Sanctions risks He suggests that future Models include the possibility of Portfolio rebalancing something that his Own models omitted for Simplicity If I understand correctly Michael also Suggests that future models be made for

Each individual country and their Respective central banks this will give A much clearer view of how they would React when faced with sanctions at least In theory what's fascinating is that Michael makes the case for China's Renminbi as a better reserve asset than BTC for central banks which already hold Chinese Yuan on their balance sheets This is simply because China is Perceived to be the rising Global power That's challenging the American World Order What's equally fascinating is that Michael believes it's possible Some Central banks may already hold BTC on Their balance sheets but refuse to Disclose this publicly this could be Because they don't want their Bitcoin Wallet addresses to be known or because They don't want to be scrutinized by the Public Michael points to the opacity of Some central banks about their fiat Currency reserves as evidence of this Possibility He also points to the fact that central Banks tend to under-report their gold Holdings when the price of gold is Falling as additional evidence which is As amusing as it is concerning now Michael concludes by speculating that Cryptocurrencies could help central Banks roll out their reform mentioned Central Bank digital currencies this is

Because a central bank could effectively Back its cbdc with a cryptocurrency like BTC That is something I would really rather Not see you can learn more about the Differences between cbdcs and Cryptocurrencies using the link in the Description So this brings me to the big question And that's why central banks might be on The brink of accumulating BTC in short Their Fiat currencies are collapsing and Not all of them can develop their own Cbdcs for such central banks adopting Cryptocurrency could very well be the Only alternative For central banks that are capable of Developing their own cbdc's their Interest in cryptocurrency might Increase as a consequence of having to Leverage similar Technologies case in Point the Central Bank of Switzerland Said earlier this year that it could Hold BTC as part of its balance sheet in The future now as pointed out by the Research paper we've just been looking At the central banks that are most Likely to accumulate BTC and other Cryptocurrencies are those in countries Facing sanctions the list of countries Targeted by the US EU and other Western Powers is likely to grow as Globalization breaks down and political Polls emerge that said Matthew seems to

Have forgotten something he mentioned at The very beginning of his analysis Recall that the effectiveness of Sanctions has been on the decline over The decades I reckon it's safe to assume That this trend will continue especially As alternative Financial systems are Developed This begs the question then of whether Central banks will even need to flee to Safe Haven assets like BTC and gold After all if sanctions are becoming less Effective then why go to the effort and Risk of accumulating assets that are Volatile or illiquid Well believe it or not but the answer Seems to be Financial cohesion consider A world where almost every Central Bank Has its own cbdc as I hinted earlier This digital centralization means that The risk of sanctions will be much Higher even if the effects will be less Severe due to the financial Fragmentation it'll be kind of like that Spider-Man meme with each Central Bank Pointing at the other wondering which One will freeze the other's assets and Why to clarify this probably wouldn't be In the context of a balance sheet No Central Bank would be crazy enough to Hold a cbdc of another at least I hope Not no the standoff between central Banks would probably be in the context Of international trade they would all

Constantly be skeptical of whether they Can safely process payments using highly Controlled foreign currencies The central banks would want an Alternative currency that they can all Trust More importantly central banks would Want a currency that they can all create Themselves well from where I'm standing The only currency that allows for this Is BTC all the central banks would need Are some Asic Miners and they could Start printing all the BTC they need BTC That the other banks will trust As you learned earlier however whoever Controls more than 51 of bitcoin's hash Rate will have the power to censor Transactions The central banks would be hyper aware Of this and it would inevitably lead to A competition between them all to ensure That no single Central Bank controls the Network This is a variation of the high-stakes Game theory of Bitcoin adoption Discussed by Fidelity earlier this year For those unfamiliar Fidelity is one of The biggest asset managers in the world And its high-stakes game theory of Bitcoin states that central banks will Eventually start stacking SATs for Financial reasons my variation of this Theory is that central banks will Eventually start mining BTC to ensure

That the Bitcoin blockchain remains Neutral so that BTC transactions can be Trusted for international trade I also Believe that there will be a huge push For privacy because central banks won't Want to reveal their BTC Holdings Although this is all speculation it Looks like this is the direction things Are headed already bitcoin's recent Taproot upgrade is a great example it Made all complex transactions look Identical increasing privacy for Institutions or anyone using bitcoin's Lightning Network meanwhile Litecoin has Introduced a privacy preserving side Chain and Litecoin has a history of Introducing upgrades prior to bitcoin as Its de facto test net It's too soon to say but I think we may Truly be on the brink of some serious Bitcoin adoption all cryptocurrencies Will ultimately benefit as well we just Have to get through the rest of this Crypto bear Market first and you can Find out when it could end using the Link in the description Foreign [Music]


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