In a virtual address given to the World Economic Forum in Davos, President Trump promised to make the United States the “world capital of artificial intelligence and crypto.”
On the same day, the White House issued an Executive Order on “Strengthening American Leadership in Digital Financial Technology.”
All of this dovetails with the proposal from Senator Cynthia Lummis for the U.S. government to accumulate a Strategic Bitcoin Reserve (SBR), as Bitcoin is the original cryptocurrency with the longest track record, highest market cap, and most liquidity (outside of pegged stablecoins).
As there is much confusion about how an SBR could work, let me explain why its proponents think it could support the US dollar and, in the long run, help pay down the federal government’s debt.
Regarding the use of an SBR to “back up” or “strengthen” the dollar, we should first be clear that the proposal is not to have an explicit redemption peg for Bitcoin, analogous to the historical tying of the US dollar to gold at the price of $20.67 an ounce (up until FDR) and thereafter $35/ounce (up until Nixon, when he formally closed the gold window).
Indeed, if the authorities were to lock-in the USD price of Bitcoin, that would eliminate future appreciation on Bitcoin (measured in USD), and hence defeat the purpose of accumulating an SBR so that its long-term gains could be used to pay down the debt.
So when proponents say that an SBR would help backstop the dollar, they don’t mean that people could turn in their dollars for a fixed number of bitcoins.
Rather, the idea is to use Bitcoin as a reserve asset, in the same way that central banks currently hold foreign currencies and gold. This gives them flexibility in keeping exchange rates between their own currencies and foreign ones, within a desired band.
For example, if the euro’s exchange rate weakens against the Japanese yen, the ECB authorities have the ability to sell off some of their yen holdings to buy euros, thus pushing the exchange rate in the desired direction.
In addition, the Fed’s massive asset purchases following the 2008 financial crisis and then the 2020 covid crisis, exposed it to interest-rate risk. Specifically, in both periods, the Fed bought more than $1 trillion of additional assets in short bursts, in the form of U.S. Treasuries and mortgage-backed securities.
These are “fixed income” assets, meaning that they promise the owner a fixed flow of US dollars over time.
Now the problem is that the Fed bought these fixed-income assets when interest rates were at rock-bottom levels. Consequently, when the Fed began aggressively raising rates (to combat CPI inflation) from 2022-2023, it suffered a massive (unrealized) capital loss on these assets (when interest rates rise, the market price of an outstanding bond goes down).
Indeed, throughout 2023 the financial press was littered with articles explaining that the Fed was “bankrupt,” and as recently as February of 2024, the American Enterprise Institute issued a report explaining that the Fed was “technically insolvent on a GAAP basis.”
Since the Fed began cutting rates last fall, the problem will ease, but the episode underscores the problem with the Fed’s balance sheet consisting largely of dollar-denominated fixed-income assets.
In this context, if the Fed and/or the Treasury had ownership of a stockpile of Bitcoin, then if it appreciated over time, as it has, fantastically, in the past, it would give the authorities more flexibility in sopping up dollars whenever it weakened beyond the Fed’s desired level.
For example, if CPI were 'running too hot', the Fed could sell off bitcoins to remove dollars from the system, and so long as the bitcoins had appreciated relative to their original purchase price, the Fed wouldn’t 'run out of ammo'—it could suck out more dollars with the appreciated bitcoins than it had to originally pump in to obtain them.
Regarding the federal debt, the idea here is pretty straightforward: Given the Trump administration’s commitment to fostering a blockchain-friendly business environment, this will surely lead to significant appreciation in the major cryptocurrencies in the long run.
Consequently, a policy of acquiring a “strategic reserve” of bitcoins—analogous to the U.S.’s Strategic Petroleum Reserve—seems obvious, from a financial management point of view.
On this front, my suggestion would be that any creation of an SBR comes with very detailed rules for its operation, to minimize the inevitable political fights down the road.
For example, if the U.S. government began heavily buying Bitcoin, that would push up its market price. Supporters of the SBR wouldn’t then want the authorities to dump it down the road, since that might crash the price—and especially given their motto of “HODL.” Yet if the authorities would always face pressure to hold, the SBR could never fulfill its promise of offsetting some of the federal debt.
Consequently, I recommend establishing very precise rules, such as: “If the 30-day average price of Bitcoin means that the SBR’s market value exceeds 50% of US GDP, then the administrators have to begin selling off the SBR at a rate of 1% (measured in bitcoins) per month, using the proceeds to buy back outstanding Treasury securities. This modest but steady selling must continue until either (a), the market value of the SBR falls below 50% of US GDP or (b), the Treasury’s debt has been eliminated.”
The above rule of course is somewhat arbitrary - I’m just giving a specific example of what I have in mind.
The financial landscape has forever been changed since the release of the Bitcoin white paper in 2008. Skeptics of government intervention in the markets—of which I am proudly one—are naturally suspicious of bold announcements in this arena.
But if central banks are going to be around for a while, it only makes sense for them to revise their operations accordingly.
If central bankers and treasury officials now use email instead of faxes, they should also consider holding crypto assets, rather than merely other government currencies, and the obvious starting point is Bitcoin.
