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How the next wave of technology is upending the global economy and its power
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How the next wave of technology is upending the global economy and its power
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ABOUT THE AUTHOR : BEN SCHRECKINGER

Ben Schreckinger is a national political correspondent for POLITICO. He also
cowrites Digital Future Daily, a newsletter chronicling how the next wave of
technology is upending power, politics and policy. Previously, he covered the
rise of Donald Trump as a campaign reporter and worked as a staff writer at
POLITICO Magazine.


DIGITAL FUTURE DAILY - POLITICO ARCHIVE


 * WEDNESDAY, 11/23/22


 * TUESDAY, 11/22/22


 * MONDAY, 11/21/22


 * FRIDAY, 11/18/22


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 * View the Full Digital Future Daily Archives »


 * MOST READ


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 3. BIDEN'S GENERATION IS CEDING THE STAGE AS HE PLOTS HIS NEXT ACT


 4. TRUMP HAS (YET ANOTHER) BAD LEGAL DAY


 5. THE NEXT ABORTION FIGHT COULD BE OVER WASTEWATER REGULATION




HARVARD PAPER TO CENTRAL BANKS: BUY BITCOIN!

By BEN SCHRECKINGER 

11/22/2022 05:11 PM EST

With help from Derek Robertson and Daniel Lippman


A view of a gate to Harvard Yard on the campus of Harvard University. | Maddie
Meyer/Getty Images

CAMBRIDGE, MASS.— Bitcoin was invented to circumvent the world’s central banks,
so the idea that those banks would start buying Bitcoin in bulk ranks somewhere
from counterintuitive to far-fetched.

But after Western governments froze Russia’s foreign exchange reserves early
this year, speculation mounted that some central banks would acquire
cryptocurrency as a form of insurance against financial blockades from the U.S.
and its allies.

In the months since, it has remained little more than speculation. But the idea
has remained a fixation among Bitcoin investors, who tend not to support U.S.
foreign policy objectives, and who view it as a good thing that crypto could
provide a workaround.

Bitcoiners’ hopes often revolve around the Gulf states, with their huge cash
reserves and often-fraught relationships with the West. In August, a Twitter
account inspired by the possibility, Sheikh Roberto, sprouted up to promote
Bitcoin usage and slam the Fed in posts from El Salvador.

Last week, we pressure-tested this idea in conversations with crypto
entrepreneurs on the sidelines of the Milken Institute’s Middle East summit in
Abu Dhabi. There, we picked up no hint that Gulf state central banks were
considering Bitcoin purchases, despite their interest in blockchain technology.

But elsewhere the idea is very much alive, at least in theory. A new working
paper on the subject 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.

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.

We hear a lot about crypto and sanctions evasion, but from the perspective of
central bank reserves, you find that gold is a more useful hedge. Why?

Because it's so much less volatile. It's like five times less volatile.

[Coincidentally or not, the level of gold accumulation by central banks smashed
its previous all-time record in the third quarter of this year, though it
remains a mystery which central banks were doing the buying. -Ed.] 

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.

Based on Russia’s disastrous experience with privatization in the 1990s, some
would say the lesson of recent history for non-Western countries is, “Beware of
Harvard economists bearing advice.” Should people trust your findings?

[Laughs] This is a framework for thinking about this topic. You may or may not
agree with the assumptions built into it. Change the number and re-run the thing
and you’ll get results that are personalized to your beliefs.

If you were advising the Treasury Department on its sanctions policy, what would
you tell them?

I think the decision to freeze a country’s reserves is so consequential it would
have to be made by the president.

What would you tell the president?

Try to put concreteness on the nebulousness of how we apply sanctions.


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THE QUANTUM EXECUTIVE BRANCH

Last Friday, the White House published an unassuming-looking memo that has big
policy implications.

In the letter, Shalanda D. Young, director of the Office of Management and
Budget, provides guidance to federal agencies for complying with an order from
earlier this year that ordered them to “quantum-proof” their cryptographic
systems. The guidance includes letting agencies know that they have until May of
next year to report their most vulnerable systems, that agencies should
designate someone to take the lead on such “cryptographic inventory” projects,
and that each agency will be required to produce an annual report as such until
the 2035 deadline for quantum-proofing federal systems.

When that kind of bureaucratic attention to detail comes into play, you know the
government is serious. The memo also establishes a working group to help
coordinate the decade-plus-long quantum-proofing project, headed by the Biden
administration’s chief information security officer Chris DeRusha, who called it
in a statement the “start of a major undertaking to prepare our Nation for the
risks presented by this new technology.” — Derek Robertson



AV LOBBYING GETS SERIOUS

A tidbit from the lobbying world: Applied Intuition, a Silicon Valley-based
startup that develops software for autonomous vehicles, has launched its own
political action committee.

POLITICO Influence reported in May on the company’s efforts to expand its
footprint in DC, including hiring lobbyists and a former aide of Rep. Marcy
Kaptur (D-Ohio) to help with its mission to “advance the deployment of safe and
trusted autonomy in civilian and defense sectors.”

By taking the next step and launching a PAC, the group said in a statement, it
hopes to “accelerate the adoption of safe and intelligent machines” like the
Army’s Robotic Combat Vehicle and Toyota’s autonomous vehicle efforts — its
hybrid defense/commercial business model being relatively unusual in the field.
— Derek Robertson and Daniel Lippman



THE FUTURE IN 5 LINKS

 * It’s looking increasingly grim for FTX customers who hope to be made whole.
 * And at Sam Bankman-Fried’s other crypto exchange, things aren’t much better.
 * Amazon withdrew a potential last-minute bid for self-driving startup Argo AI.
 * MIT researchers are trying to build robots that can… build themselves.
 * The World Cup’s high-tech refereeing system is already disgruntling fans.

Stay in touch with the whole team: Ben Schreckinger
(bschreckinger@politico.com); Derek Robertson (drobertson@politico.com); Steve
Heuser (sheuser@politico.com); and Benton Ives (bives@politico.com). Follow us
@DigitalFuture on Twitter.

Ben Schreckinger covers tech, finance and politics for POLITICO; he is an
investor in cryptocurrency.

If you’ve had this newsletter forwarded to you, you can sign up and read our
mission statement at the links provided.


GO INSIDE THE MILKEN INSTITUTE FUTURE OF HEALTH SUMMIT: POLITICO is featuring a
special edition of our “Future Pulse” newsletter at the 2022 Milken Institute
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one of the most influential gatherings of health industry leaders and innovators
solving the biggest global health issues to ensure a healthier, more resilient
future for all. SUBSCRIBE TODAY TO RECEIVE EXCLUSIVE COVERAGE.

CORRECTION: Yesterday’s newsletter incorrectly described Ken Rogoff’s work
history. His previous work includes stints as chief economist for the
International Monetary Fund and as an economist for the Federal Reserve Board of
Governors.


FOLLOW US ON TWITTER

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