Understanding the U.S. Bitcoin Strategic Reserve Plan

Bitcoin surged to a record high above $107,000 on Monday following President-elect Donald Trump’s reiteration of plans to establish a U.S. bitcoin strategic reserve, fueling optimism among cryptocurrency supporters. Here’s a breakdown of how this plan could unfold.

What is a Strategic Reserve?

A strategic reserve is a stockpile of essential resources that can be accessed during crises or supply shortages. A prominent example is the U.S. Strategic Petroleum Reserve, the largest emergency crude oil reserve globally, created in 1975 after the Arab oil embargo of 1973-74. This reserve has been tapped in response to oil market disruptions due to wars or natural disasters affecting U.S. oil infrastructure.

Other countries maintain strategic reserves, such as Canada’s stockpile of maple syrup, or China’s reserves of metals, grains, and even pork products.

How Would a U.S. Strategic Bitcoin Reserve Work?

Experts are divided on whether Trump could establish a bitcoin reserve through executive action or if it would require congressional approval. Some believe Trump could direct the U.S. Treasury’s Exchange Stabilization Fund, which handles foreign currencies, to also manage bitcoin. The reserve might include bitcoin seized from criminal activities, which currently amounts to around 200,000 bitcoins valued at approximately $21 billion. While Trump suggested in July that this could form the initial stockpile, the legal steps to transfer them from the Justice Department remain unclear.

Trump has not clarified whether the government would buy additional bitcoin on the open market. To do so, the U.S. may need to issue debt, or proponents suggest selling part of the country’s gold reserves to fund bitcoin purchases.

One of the most concrete proposals comes from pro-crypto Republican Senator Cynthia Lummis. She introduced a bill in July (still awaiting progress) that would task the Treasury with buying 200,000 bitcoins annually for five years, aiming for a total of one million bitcoins—about 5% of the total global supply of bitcoin. This purchase would be funded by profits from Federal Reserve bank deposits and gold reserves.

The bill proposes that the reserve be maintained for at least 20 years.

What Are the Benefits of a Bitcoin Reserve?

Trump has argued that a bitcoin reserve would allow the U.S. to dominate the global bitcoin market, especially as competition from China grows.

Supporters of the plan also believe that holding a stockpile of bitcoin, which is expected to appreciate over time, could help reduce the U.S. deficit without increasing taxes, thus strengthening the U.S. dollar. In November, Lummis suggested that her plan could halve the U.S. debt in 20 years, protecting the country from inflation and boosting the U.S. dollar's position globally.

A stronger dollar would provide the U.S. with more leverage against foreign adversaries like China and Russia, according to proponents.

What Are the Risks?

Critics of the plan argue that bitcoin, unlike traditional commodities, lacks intrinsic value and is not essential to the functioning of the U.S. economy. Created in 2008, bitcoin is still a relatively young and volatile asset, making its long-term value uncertain. Furthermore, crypto wallets are vulnerable to cyber-attacks, adding another layer of risk. Given its volatility, any government actions involving large bitcoin transactions could significantly impact its price.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.