A cryptic move: US cryptocurrency reserve sparks puzzlement and alarm

The announcement by American President Donald Trump that the United States will create a strategic cryptocurrency reserve has led to a big rally in the crypto market and also caused both puzzlement and alarm in broader economic circles. Mr Trump says the reserve will hold five different cryptocurrencies — Bitcoin, Ethereum, Ripple, Sol, and Ada. A strategic reserve such as the petroleum reserve the US holds (as does India) is created in order to enable action in the market when imbalances in supply and demand may cause disruption. It is hard to imagine a situation where a cryptocurrency reserve can be used to back market operations for any such purpose. Indeed, the US, which issues the world’s reserve currency, may in some sense  be undermining faith in the dollar by creating a cryptocurrency reserve.

 

While few governments are wholly comfortable with cryptocurrencies, some have substantial holdings. The US, for example, holds around $17 billion equivalent of cryptocurrencies seized from criminals, and China is estimated to hold around $19 billion. The announcement of a reserve could spark more interest from central banks and sovereign wealth funds across the world. In that sense, it is a de facto recognition of the importance of these digital assets and it could spark a long-term rally. Since the US has little forex reserves, not counting gold, its crypto holding is a substantial stash, which could perhaps be transferred into such a reserve. However, several other uncomfortable questions would arise as this reserve is created.

 

“Strategic reserves” of commodities are created by an Act of Congress and are under executive control, rather than being handled by independent institutions like the Federal Reserve. If this legislative process is followed, the President would be in a position to order market operations. A player like the US government could totally dominate the cryptocurrency market. While Bitcoin, Ethereum, and others all have somewhat different algorithms, they are generated through computerised calculations which create a limited, predictable money supply. A big spike in demand could send prices soaring. Equally, an attempt to sell a large quantity would probably lead to a crash in prices since supply would overwhelm demand. While Mr Trump has consistently refused to release a list of assets (or his tax records), he is known to have personal exposure to the crypto ecosystem. Elon Musk, who is a close adviser, is also known to have crypto interests. An ability to manipulate the cryptocurrency market through actions fuelled by US-government resources could present a massive conflict of interest. It could, to put it bluntly, enable Mr Trump and his associates to enrich themselves.

 

Moreover, while Bitcoin is decentralised with no owner of the blockchain, Ripple, Sol, and Ada are run on blockchain controlled by private entities. This could lead to further complications on this front if there is a connection between those private entities and the US government. The red flag apart, the central question remains: There is little apparent economic justification for creating such a strategic reserve. This is especially true for the US since it issues the world’s reserve currency and can essentially settle any overseas debt simply by printing dollars. The only reason to hold a reserve in crypto would be due to fears that the dollar may lose its place. This is why the mere creation of a cryptocurrency reserve could lead to the undermining of faith in the dollar.