Former U.S. president Donald Trump made the crypto industry a promise; that he would consider creating a fund that holds bitcoin as a reserve asset [1]. A number of states including Pennsylvania are reportedly considering similar proposals for incorporating state bitcoin ownership as a part of their state fiscal policies [2]. U.S. Senator Cynthia Lummis, Republican of Wyoming, promises to introduce a bill in the first 100 days of the new Trump administration that would build a new strategic bitcoin reserve [3].
Advocates are keen enough to refer to bitcoin as an asset versus a currency. Among their reasons for supporting bitcoin as a strategic asset include securing an asset that grows in value as evidenced by bitcoin’s rise in value over the last several months, especially after Mr. Trump made his proposal.
Advocates also believe that securing a reserve asset can aid the federal or a state government’s fiscal position where the cryptocurrency’s increase in value acts as a hedge against inflation.
In addition, creation of crypto reserves drives up demand for and increases in value of the asset.
On the flip side, there are critics who are concerned that creating a reserve of bitcoin could only lead to another threat to the status of the U.S. dollar.
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I am not sure, but this is likely why supporters of a reserve asset status are not touting the mantra of a reserve currency status. This to me goes to how the narrative around bitcoin has gone from an alternative to the US dollar that circumvents the middleman i.e., the banks, and now speaks of bitcoin as primarily an asset or commodity settled, ironically, in the US dollar.
But does putting a cryptocurrency as an asset into a reserve signal that somewhere down the line sooner or later that cryptocurrency could be given the same treatment as currencies with a foreign reserve status like the British pound, euro, or Japanese yen?
The reasons given for creating a bitcoin reserve asset seem aligned with the rationale for holding foreign exchange reserves. For example, buying and selling foreign exchange reserves can facilitate stabilizing the domestic currency, manage inflation, and mitigate excessive volatility.
Foreign reserves can be used to pay off international debt. They can also be used to pay for imports.
During times of crisis caused by natural disasters or crashes in the final system, a foreign reserve can be used to provide a financial buffer including access to alternative sources of capital outside of the domestic system.
And lastly, a country can invest its foreign reserves in a foreign country’s bonds, equities, or other assets to seek a return.
Proponents, especially those in government, are likely looking at how a bitcoin reserve asset can best stabilize the economy versus the other four factors discussed above. And as the returning steward of the U.S.’ economic and financial system, Mr. Trump should be concerned about whether a bitcoin reserve initiative will increase the number of transactions in the economy and about the increase in capital flow into contracts.
And just because the Republicans have majorities in the House of Representatives and the Senate does not mean Mr. Trump can easily sell his bitcoin reserve asset initiative. The United States favors reserve currencies with economic fundamentals. While we made a distinction earlier between asset and currency, whether viewed as an asset or a currency, members of Congress will question bitcoin’s lack of economic fundamentals.
Why risk U.S. taxpayer dollars or increased debt burden to create a reserve fund for cryptocurrency where the currency has no underlying infrastructure i.e., the rules of a nation-state, transportation and energy infrastructure, centralization, etc.
The short answer to the question posed in the title is maybe in the short run. Depending on how the reserve fund is structured, the markets will see the backing created by a pool of taxpayer dollars as creating a floor over which exchanges between private dollars and bitcoin can take place. In the long run, however, bitcoin will have to bring economic fundamentals to the table.
Next time, we’ll take a look at how those economic fundamentals could look.
Alton Drew
29 November 2024
Notes:
- Trump proposal for bitcoin reserve. https://www.msn.com/en-us/money/markets/donald-trump-to-establish-a-national-bitcoin-reserve-pros-vs-cons-compared/ar-AA1uS1mi?form=MG0AV3
2. Pennsylvania bitcoin reserve. https://www.benzinga.com/markets/cryptocurrency/24/11/41986427/pennsylvania-introduces-bitcoin-strategic-reserve-act-to-invest-up-to-700-million-in-btc
3. Cynthia Lummis’ bitcoin reserve bill. https://www.benzinga.com/markets/cryptocurrency/24/11/41784950/pro-bitcoin-senator-cynthia-lummis-vows-to-build-a-strategic-bitcoin-reserve-as-industry-e
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