By Gertrude Chávez-Dreyfuss and Lisa Pauline Mattackal
WASHINGTON (Reuters) – Bitcoin hit a record high above $107,000 on Monday after President-elect Donald Trump reiterated his plans to create a strategic reserve of bitcoin in the United States, stoking enthusiasm among cryptocurrency bulls. . Here’s how the plan could work.
WHAT IS A STRATEGIC RESERVE?
A strategic reserve is a reserve of a critical resource that can be released in times of crisis or supply disruptions. The best-known example is the U.S. Strategic Petroleum Reserve, the world’s largest emergency supply, which was created by an act of Congress in 1975 after a 1973-74 Arab oil embargo strangled the U.S. economy. Presidents have tapped reserves to calm oil markets during war or when hurricanes hit oil infrastructure along the U.S. Gulf of Mexico.
Canada has the world’s only strategic reserve of maple syrup, while China has strategic reserves of metals, grains and even pork products.
HOW WOULD A STRATEGIC BITCOIN RESERVE WORK IN THE US?
Analysts and legal experts are divided on whether Trump could use his executive powers to create the reserve or whether a congressional act would be necessary. Some have argued that Trump could create the reserve through an executive order directing the US Treasury’s Foreign Exchange Stabilization Fund, which can be used to buy or sell foreign currencies and also hold bitcoins.
The stockpile could include bitcoins that the government has confiscated from criminal actors. That’s equivalent to about 200,000 tokens, worth about $21 billion at current prices, according to bitcointreasuries.net. Trump suggested in a speech in July in which he presented his bitcoin reserve plan that this reserve could be the starting point, although it is not yet clear what the legal process would be to remove them from the Department of Justice.
Trump has not said whether the government would increase that reserve by buying more bitcoins on the open market. To achieve this, the government may have to issue debt, although some proponents of a bitcoin reserve say the United States could sell some of its gold reserves and use the proceeds to buy bitcoins.
Currently, the most concrete bitcoin reserve proposal circulating in Washington comes from pro-crypto Republican Senator Cynthia Lummis, who personally owns five bitcoins, she told CNBC last month. In July, he introduced a bill, still not gaining traction, that would create a reserve operated by the Treasury.
The bill provides that the Treasury would create a program to purchase 200,000 bitcoins annually for five years until reserves reach one million tokens. This would represent around 5% of the total global bitcoin supply of around 21 million. The Treasury would finance the purchases with profits from the Federal Reserve banks’ gold deposits and holdings.
Subsequently, the bitcoin reserve would be maintained for a minimum of 20 years.
WHAT ARE THE BENEFITS OF A BITCOIN RESERVE?
In his July speech, Trump suggested that a bitcoin reserve would help the United States dominate the global bitcoin market in the face of growing competition from China.
Other proponents argue that by maintaining a reserve of bitcoin, which they say will likely continue to appreciate in the long term, the United States could reduce its deficit without raising taxes, strengthening the US dollar.
In November, Lummis told Fox Business that his plan would allow the United States to cut its debt in half within 20 years. “What that does is help us protect against inflation and protect the U.S. dollar on the world stage,” he said.
A strong dollar, in turn, would give the United States more leverage over foreign adversaries like China and Russia, advocates say.
WHAT ARE THE RISKS?
Crypto skeptics say that unlike most other commodities, bitcoin has no intrinsic use and is not crucial to the functioning of the US economy.
Created in 2008, bitcoin remains too young and volatile to assume its value will continue to rise in the long term, while crypto wallets remain notoriously vulnerable to cyberattacks, they also argue. And given its volatility, any government purchase or sale could have a huge impact on the price of bitcoin.
