The illusory value of a cryptocurrency reserve
On Friday, President Trump convened a summit with cryptocurrency advocates, during which he promoted his proposal to create national reserves for bitcoin and various other crypto assets. What potential pitfalls might arise? On Thursday, Mr. Trump issued a new executive order that mandates the Treasury Department to take custody of and preserve government holdings of bitcoin and other cryptocurrencies seized during investigations into illicit activities. His articulated objective is to establish a cryptocurrency equivalent of Fort Knox, the facility that houses the United States’ gold reserves.
David Sacks, the White House cryptocurrency czar, reports that the U.S. government has liquidated approximately 195,000 bitcoin over the past ten years, generating $366 million in revenue, a sum that would now equate to roughly $17 billion. He approximates that federal agencies currently possess approximately 200,000 bitcoins, valued at $16.7 billion based on prevailing market rates; however, he notes that “there has never been a comprehensive audit.”
Mr. Trump’s directive mandates the implementation of an audit. The Treasury would subsequently oversee the government’s bitcoin holdings as reserve assets, akin to gold and foreign currencies. The Treasury will independently assess the criteria for “responsible stewardship” concerning alternative tokens such as Ripple and Ethereum. U.S. dollar reserves serve as a crucial source of liquidity and enable transactions with global counterparts. Bitcoin does not exhibit such characteristics. Although Mr. Trump characterizes bitcoin as “digital gold,” numerous nations do not acknowledge or accept it as legal tender. Gold has served as a store of wealth for centuries, whereas bitcoin has only existed for a mere 16 years.
The price exhibits significant volatility. Last week, investors divested from bitcoin alongside other high-risk assets in response to escalating trade uncertainties. On Thursday, the prices of bitcoin and various other tokens experienced a decline following the issuance of an executive order by Mr. Trump. This downturn appears to be linked to the expectations of crypto investors, who were anticipating more substantial measures to support their speculative investments in the cryptocurrency market. The directive mandates that the Treasury and Commerce Department formulate strategies aimed at increasing bitcoin acquisition, ensuring that these approaches remain budget neutral and do not result in additional financial burdens on American taxpayers. This seemingly indicates that the Treasury will refrain from issuing debt to purchase bitcoin; however, the directive still opens the door to potential governmental manipulation.
Assets confiscated through civil and criminal forfeitures are generally either returned to the victims or liquidated, with the resulting proceeds directed to the Treasury to help alleviate the budget deficit. The strategy involves retaining seized tokens as investment assets, potentially to be liquidated in the future to support the spending priorities of the presidency. Future presidents from either party may utilize the stockpile as a means to circumvent Congressional approval for expenditures.
The establishment of national cryptocurrency reserves presents potential avenues for governmental misuse. The Institute for Justice has documented instances where local law enforcement has exploited civil forfeiture laws to confiscate assets despite the absence of any wrongdoing. What prevents the Justice Department from adopting a similar approach with cryptocurrencies to enhance the Treasury’s reserves? The Treasury could potentially acquire tokens supported by the political contributors of the ruling party, thereby inflating their market value. A government cryptocurrency reserve is unlikely to yield beneficial outcomes and may instead foster conditions conducive to political misconduct. Allow private investors to engage in speculation freely, without government involvement in the valuation of cryptocurrencies.
