Donald Trump’s new strategic bitcoin reserve follows an emerging pattern in his new administration: Announce a bold idea with few details and let the market – and the public at large – try to make sense of it.
At best, the reserve could become an early step in a monetary breakthrough. Much as it did with the internet and electronic communication 30 years ago, the United States could take the lead in developing and establishing the digital technology for the next generation of money and extend the dollar’s premier status in a digital world, analysts say.
At worst, it could be a crude attempt to boost existing digital currencies for family and friends and as payback for the industry’s support during Mr. Trump’s reelection campaign.
Why We Wrote This
President Donald Trump is pushing for a cryptocurrency reserve, and digital currency enthusiasts are hopeful. But critics see risks in efforts to boost the speculative tender.
“The devil is in the details,” says Christian Catalini, founder of the MIT Cryptoeconomics Lab at the Massachusetts Institute of Technology. “I just don’t know which way this is going to go.”
On Thursday, the president announced the Strategic Bitcoin Reserve and followed up Friday with a summit of industry leaders to lay out his plans for the proposed currency reserve. Initially, the reserve would be small, made up of the bitcoin the federal government has seized from criminal operations or received in civil forfeitures. By one estimate, the government’s bitcoin holdings amount to some $17 billion.
Oldest and largest
Bitcoin is the oldest and largest digital money, also known as cryptocurrency or crypto. If the government receives other cryptocurrencies, those would be held in a separate account.
“This will be a virtual Fort Knox for digital gold to be housed within the United States Treasury,” Mr. Trump said at Friday’s summit. He also called for Congress to pass regulations so that cryptocurrencies, especially those pegged to the dollar’s value, could thrive. “This is a tremendous opportunity for economic growth and innovation in our financial sector,’’ he said.
Here’s where the visions begin to collide, and things get messy.
To some crypto enthusiasts, it’s enough for the government to buy bitcoin and hope for the profits to roll in. Bitcoin is worth more than 18 times what it was worth five years ago. But the president seemed to throw cold water on that idea, saying that the digital money would be acquired without cost to the taxpayer.
And history is littered with examples of investments that zoomed up in value only to crash later.
To their severest critics, cryptocurrencies represent the newest investment bubble where prices will plunge eventually, just as they did for tulip bulbs in 17th-century Holland and subprime loans in 21st-century America. At least those assets were backed by something physical, these critics note. Cryptocurrencies’ value is based entirely on people’s trust that others will value the digital assets and that computer codes safeguard those assets from theft.
Investors’ ride has certainly proven bumpy thus far. In the past five years, bitcoin investors have seen the price rise 13-fold, lose three-quarters of its value, rise another seven-fold to above $100,000 in the months after Mr. Trump’s election, and fall 15% since his inauguration.
A U.S. reserve might help stabilize these wild gyrations a bit, says Padhraic Garvey, head of research for the Americas for ING Financial Markets. “But at the end of the day, this is a very speculative asset.”
Risky investment or innovative new product?
Many crypto industry leaders, as well as some members of Congress, are leery of the government holding something so risky. It could not only prove unprofitable but it could also damage the industry’s reputation. Mr. Trump also faces potential reputational risk since his sons run a cryptocurrency protocol company, World Liberty Financial, which reportedly invested more than $20 million in cryptocurrencies two days before the White House bitcoin summit. Critics see the reserve idea as an open door to conflicts of interest.
Instead of government buy-in to specific currencies, many cryptocurrency leaders are pushing for federal support for a cryptocurrency platform. They want regulations that would certify the good actors and weed out the bad ones, while allowing new entrants to develop innovative products.
“The USA needs to support research into crypto-assets and offer companies in the sector an attractive tax system to enable an ecosystem to flourish,” Cyril Grunspan, director of the Paris-based Institute of Crypto-Assets, writes in an email.
Questions for regulators
In this view, cryptocurrencies represent the future of money. It’s not just that they’re digital and can zip about the world far faster and more efficiently than today’s clunky financial system. The key is that they’re not controlled by any government or company.
Instead, these currencies come with their own electronic ledger system, which is validated every time a user makes a transaction. On one hand, such money is likely to challenge the big banks, payments systems, and other players benefitting from the current protocols. On the other hand, these players are eager to expand into crypto. On Friday, the Office of the Comptroller of the Currency said national banks could participate in some cryptocurrency activities, reversing a more restrictive stance during the Biden administration.
Skeptics worry that encouraging cryptocurrency enables money laundering by criminals or oligarchs around the world – a challenge even if better regulation could partially address it.
But if the U.S. can create the regulatory framework and infrastructure that encourages financial innovation, it could position itself – and the dollar – to thrive in this emerging world of money.
“How do we extend the dominance of the dollar?” asks Mr. Catalini, founder of the MIT Cryptoeconomics Lab. “In a world that’s becoming increasingly digital, we need to make those dollars available on the platforms of the future.”
And that adoption may come faster than most people expect, says Koray Caliskan, professor of economic sociology at the New School and author of “Data Money: Inside Cryptocurrencies, Their Communities, Markets, and Blockchains.”
In a quarter century, the internet became ubiquitous. Bitcoin is 15 years old, he points out.
“In 10 years, you’re going to see everyone using it.”
