Feasibility and future of Trump’s Federal Bitcoin Reserve idea: Tyler Cowen

As governments explore new financial assets, Bitcoin has emerged as a potential player in public reserves. Senator Cynthia Lummis proposes a $67 billion Bitcoin stockpile for the Treasury, supported by Trump as a national asset. While the bill may falter, the idea raises important questions about government involvement in crypto. As nations like Argentina and El Salvador embrace both dollars and Bitcoin, the separation of state and cryptocurrency may become a thing of the past..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Join us for BizNews' first investment-focused conference on Thursday, 12 September, in Hermanus, featuring top experts like Frans Cronje, Piet Viljoen, and more. Get insights on electricity and exploiting SA's gas bounty from new and familiar faces. Register here..By Tyler Cowen.Which financial assets a central bank should buy and sell is hardly a novel question. .___STEADY_PAYWALL___.Separately, the US government maintains reserves of some critical commodities, such as its Strategic Petroleum Reserve. The Treasury also holds foreign currency reserves and SDRs, and many foreign governments go further and have extensive sovereign wealth funds that include equities, natural resources (Canada has its own strategic reserve, for maple syrup) and other assets..Now enter Bitcoin. Senator Cynthia Lummis of Wyoming has introduced a bill to have the Treasury create a $67 billion (at current value) stockpile of the cryptocurrency, and Republican presidential nominee Donald Trump supports the idea, saying it would be "a permanent national asset to benefit all Americans." The bill may not be a serious piece of legislation — it is highly unlikely to pass — but it raises a serious question: Under what circumstances can governmental purchases of cryptocurrency be justified?.Read more: Trump wows Bitcoiners, vows crypto-friendly regulation if re-elected.It is not a hypothetical. Jersey City's pension fund has plans to invest in Bitcoin, as the state of Wisconsin already is. It may well be that these plans, and politicizing Bitcoin in other contexts, are pandering to crypto holders and putting taxpayers' money at unacceptable risk. Yet if respectable private entities are investing in Bitcoin, as indeed is the case with current financial ETFs, the "separation of state and Bitcoin" is unlikely to last forever..To see one version of the case for government purchases of Bitcoin, consider Argentina, where past hyperinflation has made both dollars and Bitcoin very popular. Inflation rates are declining under President Javier Milei, but Argentina's currency future will probably still feature both currencies. Milei even suggested as much recently..El Salvador is another case in point. The country already is fully dollarized, and President Nayib Bukele has been taking steps to encourage crypto use and investment. So far his intended crypto revolution has not taken off, but the country does offer highly favorable terms for crypto users and investors. If crypto rises in importance, some of that financial activity may take place in El Salvador, if only for regulatory reasons..In short, there might be a number of governments that use dollars and crypto as a significant part of their natural monetary base, along with the domestic currency (if it still exists). In fact, the more dollarization spreads, the more the demand for crypto and Bitcoin may rise. .Many countries are aware of the advantages to using the dollar, but they may also come to see crypto as a useful tool that weakens the ability of the US government to apply financial sanctions. The end result may be more dollarization — but with crypto as a complementary back-up financial system. Crypto also could give those countries more elastic money supplies, in case they find Fed policy too tight for their economy..To bring it back to domestic US concerns: If crypto and the dollar are complements internationally, the US government might want to encourage crypto as a way to expand the reach of the dollar. The dollar truly would become further entrenched as the global reserve currency, boosting possible levels of US consumption..To continue this line of reasoning, it's useful to ask what the US could do to encourage the use of crypto. If the Fed or Treasury bought and held a modest amount of Bitcoin, as they might a lower-tier foreign currency, that would help legitimize the asset in the eyes of global financial markets. The longer-run effect could be to boost the demand for dollars as well..Even in this scenario, the case for government crypto purchases is not ironclad. One caveat is that the government might buy so much crypto that it becomes a major force in setting its price. Crypto-holding voters could then push the government to boost or maintain their portfolio values, much as homeowners often support zoning regulations or the mortgage deduction. Crypto markets would become politicized..There is also the worry that too tight a government embrace might make crypto innovators hesitant and too conservative. It is not always good for innovation to have government as a major customer. That's a reason to might hope that any public-sector investment in Bitcoin is modest..No matter what, however, the separation of government and crypto will eventually come to an end. My only suggestion is that any change be made slowly, modestly and as far removed from politics as possible..Read also:.🔒 Britain's $5bn Bitcoin stash ready to be unleashed: Merryn Somerset WebbBitcoin surges above $60,000 following Trump's response to assassination attemptBitcoin correlation with US equities plummets amid supply surge.© 2024 Bloomberg L.P.

Feasibility and future of Trump’s Federal Bitcoin Reserve idea: Tyler Cowen

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