Caution is warranted regarding the Bitcoin Strategic Reserve

Next week, once President-elect Donald Trump takes office, there will be a major change in government policy towards cryptocurrencies. Through executive orders and other actions by agencies under its control, the Trump administration will take steps to end the current “ban.”Choke point 2.0“, as financial regulators crack down on financial institutions to break up crypto-related businesses.

Cryptocurrency advocates have proposed several other good policy actions for the new president and Congress — including ending the SEC’s arbitrary classification of widely used cryptocurrencies as “securities” subject to costly SEC registration, and approving requests for… On exchange-traded funds composed of multiple cryptocurrencies. , and prevent the establishment of a Government-backed central bank digital currency (CBDC). (Similar ideas are also emerging in the new CEIFree to prosperCongressional agenda.

But one suggestion made by many cryptocurrency advocates is worth questioning: calling for the government to buy or hold bitcoin in exchange for what is hailed as a strategic bitcoin reserve. New York Times Reports On the eve of Trump’s inauguration, “the cryptocurrency industry is pushing his incoming administration to implement a bold plan that would have seemed inconceivable just a year ago: a government program to buy and hold billions of dollars in bitcoin.”

Critics of Bitcoin and cryptocurrencies in general have done so It has passed On the idea of ​​the government hoarding what they consider to be hot assets. However, even those who are optimistic about Bitcoin’s long-term value as an asset should treat the idea of ​​a government reserve with skepticism, especially the more grandiose plans.

Let us first review the types of ideas proposed for such a reserve. The first is for the federal government to simply keep much of the bitcoin it has already seized in its efforts against criminal activity, e.g Smuggling market on the Silk Road.

Trump has been cited as a supporter of “Bitcoin reserves,” but in his opinion letter At the Bitcoin 2024 conference in Nashville and other addresses, he went so far as to suggest that “the government retain 100% of all bitcoins that the U.S. government currently owns or acquires in the future,” without specifying any plans to acquire more. the future. Nick Carter also advocates for cryptocurrencies He writes In his notable pushback against ambitious Bitcoin reserve plans, Trump spoke “about Bitcoin stockpiling (as in holding existing seized Bitcoins) in his speech in Nashville, not about additional purchases of Bitcoins for the government.”

contract (or even He catches) At least some of the Bitcoin that the government currently owns is reasonable and is actually a more market neutral policy than selling a large amount at once. Germany Big sales of Bitcoin That she was in possession of has been fingered as a partial cause of Bitcoin’s collapse Sharp drop in prices Last summer. So, the US government keeping some of the bitcoin and other cryptocurrencies in its possession may be the least market-distorting alternative.

However, skepticism about the plan put forward by Sen. Sethia Lummis (R-Wis.) is justified. My colleagues at CEI and I gave Loomis well-deserved credit for her leadership in investigating and speaking out against abuses by financial regulators against the cryptocurrencies and business sectors of Choke Point 2.0 and the original Choke Point operation. We hosted her as a keynote speaker at our recent conference summit On dismantling banks and weaponizing financial regulation.

Loomis Promoting innovation, technology and competitiveness through the Nationwide Optimal Investment Code (BITCOIN). Introduced in the last session of Congress would have required the federal government to purchase 1 million bitcoins — about 5 percent of the total bitcoin supply — within a specified period of time.

At Bitcoin’s recent price of $100,000, the purchase provided for in this bill would cost the government $100 billion. But there is more. Paul Kubiak and Alex Pollock – researchers at the American Enterprise Institute and the Mises Institute, respectively – Point in The hill That if this purchase were made by the Fed, the Fed would have to borrow money for this purchase at current interest rates, which are now over 4 percent. This means that the Fed’s operating cash losses over twenty years could reach “more than 100% of the investment.”

As do I and others He said In terms of central bank digital currencies, the government’s involvement with one sector of the cryptocurrency industry is a solution in search of a problem that is sure to create many new problems. Although Bitcoin may be a more stable asset now that it is included in financial products such as exchange-traded funds, it has been declining over the past month. From a peak of around $108,000 to just under $90,000 (As of this writing, the price is back to around $105,000) shows that it could still undergo significant price declines.

So the government will need to engage in broad market timing – something like that Even the experts Nothing can be done close to perfection – to achieve significant debt reduction. There is still the possibility that the government could lose money if Bitcoin’s utility is somehow eroded in the long term.

Then, even if the government succeeds in using its Bitcoin holdings for profit, that new money in the Treasury may be too strong a temptation for the government not to spend it. Milton Friedman, the great Nobel laureate, and others have told me Interviews That the government will spend everything it has and more, and that tax cuts are the only way to prevent the government from spending a new surplus.

However, the best reason for the government not to undertake such massive purchases of Bitcoin is to avoid distorting the cryptocurrency market and harming innovation. The government choosing Bitcoin as its “reserve” cryptocurrency would be tantamount to favoring one cryptocurrency over another. This will likely support the price of Bitcoin at least in the short term – which is why many Bitcoin advocates are likely to push it – and give investors a signal of government support for this cryptocurrency. Investment dollars that could have gone to other cryptocurrencies will flow into Bitcoin, so potential innovation from other cryptocurrencies and the associated blockchains and smart contracts they can enable may be lost.

Also, with the quantity of Bitcoin fixed at 21 million units, the US government’s hoarding of 5% of the global supply may prevent Bitcoin from reaching its own potential. Innovations such as Lightning network That enables faster payments through the use of the Bitcoin blockchain may suffer from a reduced supply of Bitcoin.

Before embarking on a major government cryptocurrency project, crypto advocates should heed the words of the late CEI founder Fred Smith about the risks to innovation by supporting frontier technologies. As Freed warned in a 1993 article (excerpted in CEI’s unique quote):

“Bureaucracies are not well suited to the chaos, unpredictability, and risks inherent in advancing technology and emerging industries… Technological progress depends on breaking [the] Rot is thus stifled—never encouraged—by bureaucratic control. Government influence in this area will be curbed only if politicians develop a sense of humility about their ability to manage the economy.

Finally, it is worth noting that government reserves, even as traditional assets of undisputed value, have caused market distortions and have been vulnerable to allegations of political manipulation. President Biden’s release in 2022 of more than 40% of the US government’s holdings in the Strategic Petroleum Reserve — crude oil reserves created in the 1970s to stabilize shocks to oil supplies — Raised accusations That Biden was using the reserve to lower gasoline prices before the midterm elections that year. In 2005, scientists at the Cato Institute That’s it The costs of the Strategic Petroleum Reserve exceeded its benefits and it was proposed to cancel the reserve.

The numerous problems with government reserves and technology support in general should convince even Bitcoin and cryptocurrency enthusiasts to back away from this idea. Or at least until all the costs and benefits have been evaluated, put them in reserve.

Portions of this article originally appeared on Forbes