Next week, as soon as President-elect Donald Trump takes office, there will be a sea change in government policy towards cryptocurrency. Through executive orders and other actions by agencies under its control, the Trump administration will take steps to end the current “Chokepoint 2.0,” in which financial regulators jawbone financial institutions into debanking crypto-related businesses.
Crypto advocates have proposed many other good policy actions for the new president and Congress — including ending the Security and Exchange Commission’s arbitrary labeling of widely-used cryptocurrencies as “securities” subject to costly SEC registration, approving applications for exchange-traded funds of multiple cryptocurrencies, and blocking the creation of a government-backed central bank digital currency (CBDC).(Similar ideas are also featured in CEI’s new “Free to Prosper” agenda for Congress).
But one proposal advanced by many crypto advocates deserves skepticism: the call for the government to purchase or maintain Bitcoin for what is being hailed as a Strategic Bitcoin Reserve. The New York Times reports that on the eve of Trump’s inauguration, “the cryptocurrency industry is pushing his incoming administration to execute an audacious plan that would have seemed unimaginable just a year ago: a government program to buy and hold billions of dollars in Bitcoin.”
Critics of Bitcoin and cryptocurrency at large have pounced on the idea of the government stockpiling what they see as a faddish asset. Yet even those bullish on Bitcoin’s long-term value as an asset should treat the idea of a government reserve with skepticism, particularly the more grandiose plans.
Let’s first go through the types of ideas being proposed for such a reserve. One is for the federal government to simply hold on to much of the Bitcoin it already seized in efforts against criminal activity, such as the Silk Road contraband market.
Trump has been cited as a proponent of a “Bitcoin reserve,” but in his speech at the Bitcoin 2024 conference in Nashville and other addresses, he has only gone as far as proposing that the government “keep 100% of all the Bitcoin the U.S. government currently holds or acquires in the future,” without outlining any plans to acquire more in the future. As cryptocurrency advocate Nic Carter writes in his notable dissent against ambitious Bitcoin Reserve plans, Trump “talked about a Bitcoin stockpile (as in, holding existing seized Bitcoins) in his speech in Nashville, not the additional purchase of Bitcoins for the government.”
Holding (or even hodling) on to at least some of the Bitcoin the government currently holds is sensible and is in fact a more market-neutral policy than selling a large amount at once. Germany’s large sale of bitcoin in its possession was fingered as a partial cause of Bitcoin’s sharp drop in price last summer. So, the US government keeping some of the Bitcoin and other cryptocurrencies it has may be the least market-distorting alternative.
However, skepticism is warranted for the plan introduced by Sen. Cythia Lummis (R-WY). My CEI colleagues and I have given Lummis due kudos for her leadership in investigating and speaking out against abuses from financial regulators against cryptocurrency and business sectors in Choke Point 2.0 and the original Operation Choke Point. We hosted her as a keynote speaker at our recent summit on debanking and the weaponization of financial regulation.
Lummis’s Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide (BITCOIN) Act introduced in the last session of Congress would have required the federal government to purchase 1 million Bitcoin units — about 5 percent of the total word Bitcoin supply — over a set period of time.
At a recent price of Bitcoin of $100,000, the purchase prescribed by this bill would cost the government $100 billion. But there’s more. Paul Kupiec and Alex Pollock – scholars respectively of the American Enterprise Institute and the Mises Institute — point out in The Hill that if this purchase were made by the Federal Reserve, the Fed would have to borrow money for this purchase at current interest rates, which are now above 4 percent. That means that over 20 years, the Fed’s operating cash losses could come to “more than 100 percent of the investment.”
As I and others have said about CBDCs, this involvement of government with one segment of the crypto industry is a solution in search of a problem that will almost certainly create many new problems. Although Bitcoin may be a more stable asset now that it is included in financial products such as exchange-traded funds, its slump during the past month from a peak of around $108,000 to just below $90,000 (as of this writing, it’s back around $105,000) shows that it can still be subject to significant price drops.
So the government would need to engage in extensive market timing – something that even experts can’t do with anywhere near perfection – to achieve significant debt reduction. And there is still the possibility that the government could lose money if somehow the utility of Bitcoin erodes over the long term.
Then, even if the government is successful in utilizing its Bitcoin holdings to make a profit, that new money in the Treasury may well prove to be too powerful a temptation for the government not to spend it. The great Nobel Laureate Milton Friedman told me and others in interviews that the government will spend all it has and more, and tax cuts are the only way to keep government from spending a new surplus.
However, the best reason for the government not to undertake such an extensive Bitcoin purchase is to avoid distorting the crypto market and harming innovation. The government choosing Bitcoin as the cryptocurrency for its “reserve” would be engaging in favoritism for one cryptocurrency over another. This would likely prop up Bitcoin’s price at least in the short term – a reason many Bitcoin advocates are likely pushing it – and give investors a signal of government backing this crypto. Investment dollars that might have gone to other cryptocurrencies would flow into Bitcoin, and thus potential innovation from other cryptos and associated blockchains and smart contracts they could enable might be lost.
Also, given Bitcoin’s fixed quantity at 21 million units, the US government’s hoarding of 5 percent of the global supply may well keep Bitcoin from reaching its own potential. Innovations such as the Lightning Network that enables faster payments through the use of the Bitcoin blockchain may suffer with a reduced Bitcoin supply.
Before going headlong into a big-government crypto project, crypto advocates should heed the words of CEI’s late founder Fred Smith on the dangers to innovation of from subsidizing frontier technologies. As Fred warned in a 1993 essay (excerpted in CEI’s The Quotable Fred):
“Bureaucracies aren’t well-suited to the messiness, the unpredictability, the inherent risks of advancing technology and nascent industries … Technological progress depends upon breaking [the] mold and is therefore stifled – never encouraged – by bureaucratic control. Only if politicians develop a sense of humility about their ability to manage the economy will government’s influence in this area be curbed.”
Finally, it’s worth noting that government reserves, even with more traditional assets of undisputed value, have caused market distortions and have been subject to allegations of political manipulation. President Biden’s releasing in 2022 of more than 40 percent of the US government’s holdings in the Strategic Petroleum Reserve – the crude oil stockpile created in the 1970s to stabilize shocks to oil supply – sparked accusations that Biden was using the reserve to lower gasoline prices before the midterm elections of that year. In 2005, scholars at the Cato Institute concluded that the costs of the Strategic Petroleum Reserve exceeded its benefits and proposed abolishing the reserve.
The many problems with government reserves and technology subsidies in general should persuade even Bitcoin and crypto enthusiasts to back away from this idea. Or at least until all costs and benefits are assessed, put it on reserve.
Portions of this article originally appeared in Forbes
