Trump’s crypto reserve: An odd idea with a silver lining for the world

If any other owner of a cryptocurrency platform had announced a national reserve of cryptocurrencies, howls of protest over conflict of interest would have rent the air. 

When President Donald Trump declared that the US would create a Bitcoin reserve and a separate crypto stockpile, his fan base took it as a move to fulfil a campaign promise. But the proposal he unveiled last week seemed like a bit of a con. 

For Bitcoin, the US government will merely rename its existing holdings as a strategic reserve. No additional tokens will be bought. No federal funds being deployed also goes for the multiple-crypto stash to be held alongside. What’s already in the US crypto vault had fallen into state ownership as a result of legal proceedings against wrongdoing.

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Trump’s pro-crypto stance remains, though. He has a stake in World Liberty Financial, a crypto venture that launches tokens, plus lends and sells them without intermediaries. His wife Melania owns a crypto token, $Melania, while close associate Elon Musk is the owner and champion of several meme coins and tokens. Trump’s embrace of the concept during his campaign had enthused crypto-happy voters and his win set off a crypto bull run.

Last week’s news of a Bitcoin reserve was expected to justify and strengthen its rising price. It dropped, instead, once it became clear that the proposal was ‘budget neutral’ and would not support prices through government demand.

These digital tokens have value only because people ascribe value to them, not because they have any intrinsic worth. Just as the works of Van Gogh and MF Husain are valuable assets because a large enough number of people agree, and no fresh supply is possible since these artists are dead, digital tokens ride on market perception and supply limits.

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The number of Bitcoin that can be mined, for example, has an upper bound set by the algorithm used to generate it. Eventual scarcity in relation to demand is what other tokens count on too. Since their market prices lie in the eyes of beholders, price volatility is a given, which explains why it’s a high-risk investment. All sorts have proliferated and gained varying degrees of market legitimacy.

Globally, regulators have been wary of giving them official validation. So too in the US under earlier administrations. Its Securities Exchange Commission under Joe Biden had agreed to regulate spot trades in exchange-traded products (ETPs) whose portfolios included Bitcoin on the ground that ETP rules had to be asset agnostic. Under Trump, if a central treasure chest were to make arbitrary crypto picks and/or venture into active trading, it would be scandalous.

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As a concept, crypto arose as an alternative to fiat currencies open to state manipulation, so it would also be ironic if the state itself began to move crypto prices. The proposal’s market neutrality is thus a relief, but this policy must hold firm.

That said, there may actually be a silver lining to Trump’s crypto policy. Acceptance of the blockchain ledgers that underlie these tokens could plausibly inspire a US central bank digital currency (CBDC): say, a Fed-run token pegged to the dollar. Similarly regulated and kept stable, other CBDCs linked to it globally could go a long way to protect the dollar’s global role as a medium of exchange and store of value—a major Trump aim. 

Quick, efficient and low-cost payments across and within borders would work in favour of all involved. The Bank for International Settlements has such a system being chalked out. It needs a push.