How would a US bitcoin strategic reserve work?

By Gertrude Chavez-Dreyfuss and Lisa Pauline Mattackal

WASHINGTON, Dec 16 (Reuters) – Bitcoin hit a record high above $107,000 on Monday after newly elected President Donald Trump reiterated plans to create a U.S. bitcoin strategic reserve, fueling enthusiasm from crypto bulls. Here’s how the plan could work.

WHAT IS A STRATEGIC RESERVE?

A strategic reserve is a stockpile 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 stockpile of emergency crude oil, which was created by an act of Congress in 1975 after a 1973-74 Arab oil embargo curbed the U.S. economy. Presidents have tapped the supply 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 US STRATEGIC BITCOIN RESERVE WORK?

Analysts and legal experts are divided over whether Trump could use his executive powers to create the reserve, or whether an act by Congress would be necessary. Some have argued that Trump could create the reserve through an executive order directing the U.S. Treasury Department’s Exchange Stabilization Fund, which can be used to buy or sell foreign currencies, as well as hold bitcoin.

The reserve could include bitcoin that the government has seized from criminal actors. That amounts to about 200,000 tokens, which is worth about $21 billion at current prices, according to bitcointreasuries.net. Trump suggested in a July speech unveiling his bitcoin backup plan that this stockpile could be the starting point, although it remains unclear what the legal process would be to remove them from the Justice Department.

Trump has not said whether the administration would increase that supply by buying more bitcoin on the open market. To do that, the government may have to issue debt, although some advocates of a bitcoin reserve say the United States could sell some of its gold reserves and use the proceeds to buy bitcoin.

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 she presented a bill, which has still not gained popularity, that would create a reserve to be managed by the Ministry of Finance.

The bill envisions that the Treasury would establish a program to purchase 200,000 bitcoins annually for five years, until the supply reaches one million tokens. This would represent about 5% of the total global bitcoin supply of about 21 million. The Treasury Department would finance the purchases with profits from the Federal Reserve banks’ deposits and gold holdings.

The bitcoin reserve would then be held 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 US dominate the global bitcoin market in the face of growing competition from China.

Other proponents argue that by maintaining a supply of bitcoin, which they say is likely to continue rising in the long term, the U.S. could reduce its deficit without raising taxes, thereby strengthening the U.S. dollar.

In November, Lummis told Fox Business that her plan would allow the United States to halve its debt within 20 years. “What that does is help us protect ourselves from inflation and protect the U.S. dollar on the world stage,” she said.

A strong dollar would in turn give the United States more leverage over foreign adversaries like China and Russia, advocates say.

Crypto skeptics say that bitcoin, unlike most other commodities, has no intrinsic utility and is not crucial to the functioning of the US economy.

Founded 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 cyber attacks, they also argue. And given its volatility, any government purchases or sales could have an outsized impact on Bitcoin’s price.

(Writing by Michelle Price; additional reporting by Hannah Lang; Editing by Rosalba O’Brien)