President Donald Trump is moving toward implementing a crypto-friendly administration. A clear indicator of this direction is the appointment of David Sacks as the White House artificial intelligence and crypto czar.
This appointment has fueled speculation about what the so-called crypto czar role will look like and what, if any, meaningful policymaking power it will have. Will the role lead to clearer regulation? Will Sacks serve merely as an adviser without a formal government title or authority? Will the role lead to a new reserve where the government holds and secures crypto-assets?
A U.S.-backed crypto reserve could pave the way for some desperately needed clarity in this digital space — such as which governmental body will regulate cryptocurrencies — that could chart the path for the full and complete integration of crypto into our daily spending and investment, and the adoption of blockchain technology in larger government initiatives.
Bitcoin, the most widely recognized digital asset, has been seen as the industry standard, and Trump has endorsed calls for a strategic bitcoin reserve.
The new administration has the opportunity to lead what could mark the beginning of an era defined by innovation, digital credit and the global acceptance of not just bitcoin, but also cryptocurrencies generally, whether as a security or commodity.
Digital Asset Diplomacy: How the Fed Could Utilize Cryptocurrencies
The Federal Reserve’s Role
The Federal Reserve serves as the nation’s central bank, managing monetary policy, controlling inflation, regulating financial institutions, ensuring efficient payment systems and promoting consumer protection.
The hallmark of the Fed is its political independence, which allows it to focus on long-term economic stability. Part of its role requires it to work closely with other federal agencies, including the U.S. Department of the Treasury, U.S. Securities and Exchange Commission, and Federal Deposit Insurance Corp. to provide comprehensive oversight and stability.
For example, the Fed collaborates with the Treasury to manage government debt issuance and liquidity in bond markets. It works alongside the SEC to enhance financial market stability, and coordinates with the FDIC to secure deposits and maintain banking system integrity.
To achieve its goals, the Fed utilizes a range of tools, including adjusting interest rates to influence borrowing costs, conducting open market operations through the buying and selling of Treasury securities, and setting reserve requirements to ensure banks maintain sufficient liquidity.
Additionally, the Fed oversees key components of the nation’s payment and settlement systems, including processing electronic payments and maintaining the currency supply.
A Vision for Cryptocurrency Reserves
Trump’s proposal for a crypto reserve — whether aimed at enhancing financial stability, curbing inflation, managing the national debt or fostering innovation — would require strategic collaboration, with the Fed being the most appropriate agency to pave the path forward.
Much like its role in managing traditional assets, the Fed’s involvement in potential cryptocurrency reserves could shape its success, ensuring alignment with broader fiscal and monetary objectives.
In addition, the upcoming administration’s embrace of crypto demonstrates its confidence in the Fed’s capability to manage cryptocurrency reserves effectively.
A national crypto reserve could conceptually function as a strategic asset akin to traditional reserves like gold. Proponents argue that cryptocurrency reserves would reduce the national debt, free up U.S. dollars for other uses and position cryptocurrencies as long-term financial assets.
Such a reserve could also act as a stabilizing factor, regardless of whether the digital assets are classified as securities, commodities or currencies, and foster reliability and credibility to full faith in crypto.
Cryptocurrencies as a Commodity and a New Gold Standard
Historical Context and Standards
Financial standards play a pivotal role in economic stability and consumer trust. Historically, systems like the gold standard offered a fixed framework for currency valuation, tying national currencies to a specific quantity of gold.
Under this system, currencies were convertible into gold at a fixed rate, providing stability and predictability in financial markets and trade. Central banks maintained gold reserves and limited the money supply in proportion to these reserves, promoting fiscal discipline.
Today, the U.S. government guarantees various securities through its so-called full faith and credit system, guaranteeing reliability even without physical backing. This principle refers to the government’s unconditional guarantee to honor its debts, bolstering confidence in government-issued securities.
For consumers, full faith and credit provides investments in instruments like Treasury bonds are backed by the government’s ability to levy taxes or issue currency, offering a secure and stable form of credit and investing.
From a policy perspective, full faith and credit facilitates economic management by enabling the government to raise funds efficiently through debt issuance.
This system supports critical initiatives, such as infrastructure development and emergency relief programs, by ensuring access to capital markets. Moreover, it underpins trust in the broader financial system, providing a foundation for policies aimed at fostering economic growth and resilience.
Project Crypto: A Plan for Regulatory Clarity
Sen. Cynthia Lummis, R-Wyo., has championed the idea of a national bitcoin reserve.[1] Her plan envisions accumulating 1 million bitcoin over 20 years to hedge against inflation and complement the U.S. dollar.
The proposal involves converting Fed gold certificates into bitcoin and establishing a strategic reserve with a 20-year minimum hold period.
Future cryptocurrency frameworks must address property rights, ownership protection, secure custody solutions, and most importantly, which agency regulates cryptocurrencies, as well as when, and how, it is categorized as a security under SEC v. Howey[2] — decided in 1946 by the U.S. Supreme Court — or a commodity.
The Lummis bill addresses these regulatory challenges, proposing clearer distinctions between securities and commodities to simplify compliance for crypto businesses. The bill includes specific funding mechanisms and regulatory frameworks, shifting oversight from the SEC to the U.S. Commodity Futures Trading Commission for certain crypto-assets.
With the surge of cryptocurrency, courts have grappled with whether certain digital assets qualify as a security or a commodity.[3] The blurred line here has drawn various distinctions and confusing standards for the industry to follow.[4] A clearer regulatory framework for digital assets as a whole, and one that embraces cryptocurrencies in a defined manner, is essential.
The Howey test will continue to apply, but the 1946 test has become antiquated when it comes to cryptocurrencies — something the courts back then could not have envisioned.
Although a digital asset is not in and of itself a security, the new administration’s voice for acceptance of the crypto industry at large, and an embrace of cryptocurrency reserves, could push for a new regulatory framework that clarifies the blurred lines of securities and commodities.
Clearer legal standards and frameworks would make companies more equipped to operate their exchanges to offer cryptocurrencies; allow institutions to invest; allow consumers to be able to buy, sell and use digital assets without uncertainty; and continue the acceptance of the full faith in crypto.
Strategic Petroleum Reserve as a Model
The U.S. Department of Energy demonstrates how government-maintained commodity reserves can influence markets and policy through its management of the Strategic Petroleum Reserve.
Although the SPR is relevant to energy companies maintaining reserves and indirectly to broader consumers, which differs from the crypto industry, it serves as a foundational model to begin framing cryptocurrency reserves.
The SPR is used to stabilize oil prices, offset budget deficits and generate revenue, and provides leverage in global markets. Similar to how the SPR affects energy markets and inflation, cryptocurrency reserves could affect digital asset markets and monetary policy.
While the DOE manages day-to-day operations, the president may order directives for releases of the reserves. Congress may authorize the sale of oil from the SPR to fund government spending or to respond to emergencies and legislative mandates, such as periodic sales, and influence reserve levels.
Therefore, the SPR affects financial and monetary policy, including stabilizing oil prices, as well as energy commodities and inflation expectations.
Similarly, cryptocurrency reserves could stabilize crypto markets, hedge against economic instability and influence global crypto adoption. Just as Congress authorizes SPR sales to fund government initiatives, legislative mandates could dictate crypto reserve usage.
With a bitcoin reserve, the Fed would act similar to the SPR, and the CFTC could manage the underlying assets like the DOE, being the regulatory enforcement and governing body.
The Fed would strategically influence crypto-related policies, as well as manage and stabilize government crypto funds. It could also ensure an excess is available to offset budgets and generate revenue, and protect consumers’ underlying interest.
The Fed would also continue its ability to set rates, borrow and fund government projects, all while collateralizing cryptocurrencies.
Lummis’ bill addresses that the Treasury would play a role in managing and securing a bitcoin reserve, just as the Treasury collaborates now with the Fed.
Proposals for decentralized vault systems managed by the Treasury could provide secure storage for national cryptocurrency reserves, which could address ownership and custody issues while ensuring transparency and accountability, in line with the public’s growing acceptance of full faith in crypto.
A Balancing Act: Efficiency, Innovation and Development
The prospect of a national crypto reserve reflects a transformative vision for the U.S. economy, blending traditional financial principles with emerging digital technologies.
However, the evolution in cryptocurrency policy represents a significant shift from bitcoin’s original decentralized vision, for example, to a more regulated, government-integrated future.
The challenges lie in maintaining consumer efficiency to use, invest and innovate digital assets while balancing the decentralized historical concept.
Even with a decentralized focus, the growth of the industry has reached a point where there are calls for oversight and limited government intervention to provide regulatory guidance, which has become necessary given the vague legal standards and the need for consumer protection mechanisms. A full faith in crypto under the new administration sees the value in setting the stage.
Development is needed to set rules for everyone to play the game.
By embracing cryptocurrency, the new administration has the potential to develop a future defined by innovation, stability and global leadership in the digital asset space. Whether through federal initiatives, state-level efforts or regulatory reforms, the U.S. is poised to navigate this new frontier with strategic foresight and adaptability.
Congressional approval faces calls from lawmakers concerned about economic stability and inflation, while ongoing regulatory uncertainty and public skepticism could impede progress. The new administration’s ability to balance efficiency and innovation with appropriate oversight will determine the success of any national cryptocurrency reserves and the crypto industry at large in the U.S.
Notably, as other nations adopt cryptocurrency policies, the U.S. risks falling behind without proactive measures. Establishing cryptocurrency reserves and implementing supportive regulations could solidify the U.S.’ leadership in the global crypto economy, driving innovation and investment.
The U.S. has consistently held itself to high standards for consumer protection, data security and financial trading, and as the leader in capital markets.
Thus, if other countries progress ahead, there are risks of less stable policies protecting digital assets, and the U.S. should set forth its full faith in crypto as the crypto capital of the world.
Stefanie Wayco is a partner, Matthew Catania is a senior associate and Gregory Bailey is an associate at Duane Morris LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
References
[1] Full text of the previously proposed bill is available here: https://www.congress.gov/bill/118th-congress/senate-bill/4912/text. Sen. Lummis is expected to reintroduce the bill during the new administration. See Zach Halaschak, Lummis plans renewed push for strategic bitcoin reserve after Trump win, Wash. Examiner, Nov. 22, 2024, https://www.washingtonexaminer.com/policy/finance-and-economy/3237933/lummis-renewed-push-strategic-bitcoin-reserve/#google_vignette.
[2] SEC v. W.J. Howey Co. , 328 U.S. 293 (1946). The United States Supreme Court defined an investment contract, or a security, in Howey as an investment of money, in a common enterprise, with an expectation of profits or losses from the efforts of others. Id.
[3] See, e.g., SEC v. Ripple Labs Inc. , 682 F.Supp.3d 308 (S.D.N.Y. 2023); SEC v. Terraform Labs Pte. Ltd. , 684 F.Supp.3d 170 (S.D.N.Y. 2023); SEC v. Payward Inc. , 2024 WL 4511499 (N.D. Cal. Aug. 23, 2024).
[4] See, e.g., Terraform Labs Pte. Ltd., 684 F. Supp. 3d at 191 (noting SEC’s view “that some cryptocurrencies may fall within the regulatory ambit of federal securities laws.”) (emphasis added); Ripple Labs, 682 F. Supp. 3d at 324 (a digital asset “is not in and of itself” an investment contract under Howey).
Reprinted with permission of Law360.
