On March 6, United States President Donald Trump issued an executive order to establish a Strategic Bitcoin Reserve and a US Digital Asset Stockpile. The reserve would be built with Bitcoins forfeited as part of criminal or civil asset forfeiture proceedings and currently owned by the Department of Treasury. The order also clarifies that other government agencies, if any, holding such currencies, would evaluate their legal authority and accordingly, transfer them to the reserve.
The order also states that the US will not sell Bitcoins deposited into this strategic reserve, and it will be maintained as a store of reserve assets. It also authorizes the Secretaries of the Treasury and Commerce to develop budget-neutral strategies for acquiring additional Bitcoins, provided that those strategies impose no incremental costs to American taxpayers. It means the government will not acquire additional assets for the US Digital Asset Stockpile bnd those obtained through forfeiture proceedings.
This reserve shall function much like the Strategic Petroleum Reserve that countries, including India, maintain as a hedge against unexpected problems with the supply and demand of the fuel, causing disruption. However, it is hard to visualize a situation where a cryptocurrency reserve can be used to meet such challenges emerging in financial markets. This reserve, indeed, raises several uncomfortable questions.
Currently, the US is said to hold around $17 bn equivalent of cryptocurrencies seized from criminals, while China is said to hold around $19 bn. As of the date, many governments are in general, not comfortable with cryptocurrencies. Now the question is: Would this US announcement about creating a reserve spark more interest from Central Banks across the world? If that happens, a kind of de facto recognition may be afforded to the importance of these digital assets, which could spark a long-term rally.
Here, it should be remembered that the supply of Bitcoins is fixed, and there are only 21 million in circulation. Similarly, for Ethereum and others, though they have different algorithms, their creation through computerized calculations is again limited. So, a big spike in demand could send prices skyrocketing. In a similar vein, any attempt to sell a large quantity would probably result in a price crash, since supply would overwhelm demand. No wonder, in such a rally, the US, with its huge reserves, would of course, become the dominant player in the market.
In additon, while Bitcoin is decentralized with no owner of the blockchain, others like Ripple, Sol and Ada are run on blockchain controlled by private entities. This phenomenon creates further complications. With Gray Gensler resigning as Chairman of the Securities and Exchange Commission, it is anticipated that there is going to be a shift from an antagonistic stance to a pro-crypto stance.
This emerging “combination of greater legitimacy and light regulation is what I really worry about”, said Eswar Prasad, Senior Fellow at the Brookings Institution. Adding, “The broader adoption of crypto at both the retail and institutional level certainly could pose some risks”.
The risks are indeed evident already: After Trump’s statement, Bitcoin price has slumped about 20%, while Solana, XRP and ADA have slumped by about 50%, 30% and 22%, respectively. The apparent reason for such slide is: the crypto industry is not happy with Trump administration not buying Bitcoins but only capitalizing on the value of Bitcoins forfeited by criminals, which are already in the possession of government agencies.
That aside, as Hilary Allen, Law Professor at American University, said, “the crypto industry is built on a foundation of regulatory non-compliance”, and this lack of response has led to spectacular frauds in the past. Still luckily, their consequences—price crash in 2022—were contained because the volatile and fraud-prone cryptocurrency market was then not so integrated with the traditional financial markets, which factor worked as a firewall limiting its damage to actual investors in the crypto asset alone. But with the kind of easing of the regulatory regime in the offing, there is going to be a much broader adoption of cryptocurrency, which is more likely to pose systemic financial risks. If there is a run on coins, it could, this time round, “set off a chain of events that end up destabilizing various parts of the traditional financial system”, said Prasad.
Risks
aside, according to some economists, there appears to be little or no economic
justification for creating such a strategic reserve. More so by the US, for its
dollar is the world’s reserve currency, because of which, it could easily
settle its overseas liabilities by printing dollars. Indeed, creation of a
cryptocurrency reserve may, as feared by a section of economists, undermine
faith in the dollar. For now, that is the irony!
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