How would a strategic crypto reserve work? - Analysis/ US studies criteria for creating a digital currency fund
United States President Donald Trump has provided some initial details about a US cryptocurrency reserve, saying it would include bitcoin, ethereum and several smaller coins.
In January, Trump signed an executive order creating a digital asset task force to explore the possibility of a strategic bitcoin reserve. He had ordered the group to submit a report by July setting out the criteria for such a stockpile, which would consist of cryptocurrencies seized by the federal government.
What is a strategic reserve?
A strategic reserve is a stockpile of a critical resource that can be released in times of crisis or supply disruption. The best-known example is the U.S. Strategic Petroleum Reserve, the world's largest emergency supply of crude oil, which was created by an act of Congress in 1975 after a 1973–74 Arab oil embargo hit the U.S. economy. Presidents have tapped the reserves to calm oil markets during wartime or when hurricanes hit oil infrastructure along the Gulf of Mexico.
Canada has the world's only strategic reserve of maple syrup, while China has strategic reserves of metals, grains, and even pork products.
Which cryptocurrencies will be in the US strategic reserve?
Smaller coins like XRP, Solana and Cardano will be included in the stockpile, Trump said. This was the first indication that the reserve would hold currencies other than bitcoin. Bitcoin and ethereum, the two largest cryptocurrencies by market value, will be “the heart of the reserve,” Trump said in a later tweet.
How will a strategic bitcoin reserve work in the US?
The exact method of creating a crypto reserve remains uncertain. The task force was directed to assess the potential of creating a stockpile of seized cryptocurrency through law enforcement efforts. Trump said in a post on Truth Social that his January executive order on digital assets would create a stockpile of the currency.
Currently, that’s about 198,109 bitcoins, worth about $18.5 billion at market prices. It remains unclear what the legal process will be for the Justice Department to remove them. Trump has not said whether the government would add to that stockpile by buying more bitcoins, and the order offers no further specific guidance.
A bill was introduced in July that would create a reserve operated by the Treasury. The bill would establish a program for the Treasury to purchase 200,000 bitcoins per year for five years, until the stock reaches one million coins. That would represent about 5% of the total global supply of bitcoins of about 21 million. The Treasury would fund the purchases with earnings on deposits at Federal Reserve banks and gold holdings. The bitcoin reserve would then be held for a minimum of 20 years.
Meanwhile, lawmakers in about 24 individual U.S. states have introduced legislation to create their own bitcoin reserves. However, the measures have failed in four states.
What are the benefits?
In a July speech, Trump suggested that a bitcoin reserve would help the US dominate the global market in the face of growing competition from China.
Other proponents argue that by holding a bitcoin reserve, which they say will continue to appreciate in the long term, the US can reduce the deficit without raising taxes, strengthening the US dollar.
According to supporters, the plan would allow the United States to halve its debt in 20 years, creating a hedge against inflation. A strong dollar would give the United States a greater advantage over foreign adversaries such as China and Russia, they say.
What are the risks?
Skeptics say that, unlike most other commodities, bitcoin has no domestic use and is not crucial to the functioning of the American economy.
Created in 2008, bitcoin remains too young and volatile to assume its value will continue to rise in the long term, while crypto programs remain highly vulnerable to cyberattacks. And given the currency's volatility, any government purchases or sales could have a major impact on bitcoin's price.
The price impact would be even more pronounced for large purchases of smaller cryptos like Cardano and XRP, which generally have much lower trading volumes. The reserve is expected to be a major topic of discussion at the upcoming cryptocurrency summit at the White House on March 7.
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