America and the crypto industry both seemed to have dodged a bullet last week when President Trump announced a far less ambitious Bitcoin reserve than some had hoped. The Federal Government won’t sell any of the coins it already holds and will explore “revenue neutral” ways of acquiring more. But even this is a mistake.
America does not need such a reserve. Setting one up undermines the Federal government’s neutrality in picking winners and losers and sends the wrong signal about the stability of the dollar. Perhaps more importantly, the nascent cryptocurrency industry will only be harmed by such entanglement.
To be clear: the President was right in establishing a pro-crypto agenda. Blockchain technology is a powerful tool for reinventing financial services, expanding economic inclusion, and extending the dollar’s reserve status. Countless Americans from all walks of life believe in the technology and even more invest in some kind of digital asset or collectible. The Biden administration’s well-documented attempts to suppress the industry via regulatory overreach both slowed down development and cost America valuable jobs and tax revenues. It also harmed the credibility of important regulatory agencies like the SEC and the FDIC.
But there’s a clear distinction between setting up the rules of engagement versus picking winners and losers. Thankfully, most of the Trump administration’s initial proposals for crypto achieved the former. His first executive order on digital assets — signed within days of him taking office — called for a working group of different Federal agencies chaired by a new Special Advisor on AI and Crypto. It further asked the group to “propose a Federal regulatory framework governing the issuance and operation of digital assets, including stablecoins, in the United States.”
Such a framework is something the more responsible members of the cryptocurrency industry have been wanting for years. But a less responsible cohort has also wanted the Federal government to directly purchase Bitcoin and other cryptocurrencies as part of a strategic reserve. This is a bridge too far and will someday bastardize what the technology is meant to achieve.
Blockchain technology is a radical attempt to create a fairer financial system. Bitcoin is the first monetary asset whose supply and transaction integrity is enforced by code and cryptography, as opposed to people and companies. Its perceived neutrality is one reason it has become a trillion-dollar asset, increasingly accepted by institutions. Other solutions extend this neutrality to more sophisticated financial interaction, digital collectibles and art, and even the US dollar. While critics often see crypto as an attempt to subvert the rule of law, what those of us on the inside realized long ago is that it could achieve the opposite when used properly.
But those values start to fall apart when the blunt mallet of the Federal government starts swinging around. Politics is inherently unstable and we live in an era of polarization. If one administration can buy cryptocoins for a reserve, the next can sell, reeking havoc with markets. Both activities open the door to insider trading and other unintended consequences. Worst of all, the mere possibility of inclusion in such a reserve is likely to bias and bastardize development. If crypto is going to succeed, then it should be users and markets who decide which approach is best, not lobbyists and bureaucrats.
To wit: President Trump’s initial social media announcement on a strategic reserve teased a desire to include certain smaller coins out of the mainstream. One empowers a blockchain that nobody ever uses. Its only claim to fame is the fact that the coin’s founder has not one but two private jets. The other shouldn’t even qualify as a cryptocurrency because it was issued by a corporation that still holds most of the supply. He thankfully decided not to do this, but both coins jumped materially on the news, and the social media misinformation hucksters who love promoting this kind of thing now have a new weapon in their arsenal. They’ll either lie and say the coins are already included or promise they will be soon. Only a clear message of no reserve could have stopped this.
Even the President’s call to explore ways of adding more Bitcoin to the reserve in revenue-neutral ways is problematic. Who decides how much, and at what prices? Which exchange will the purchases be made through and who will be the custodian? The next time there’s some controversy over how to upgrade the Bitcoin protocol, will the Feds get a major say? What’s to stop them from manipulating progress by threatening to start selling if the network didn’t do what they wanted?
Never mind that no decision is ever “revenue neutral” when you owe trillions of dollars in debt and run massive deficits. Whatever dollars go into Bitcoin could just as easily be spent on paying down the debt. To argue otherwise is to ignore the precarious situation of America’s finances.
The opening paragraph of President Trump’s initial executive order on crypto stated its intentions elegantly:
“to promote United States leadership in digital assets and financial technology while protecting economic liberty.”
A strategic crypto reserve does neither.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of ZeroHedge.
