The White House hosted a gathering of cryptocurrency industry leaders last week to discuss President Donald Trump’s vision for transforming the United States into the “crypto capital of the world.” Perhaps the best thing about the summit is that it suggests the administration is truly open to innovation with crypto, and that’s a positive change from previous administrations.
For more than a decade, most federal officials have viewed crypto skeptically at best. As a result, many in the crypto industry still badly need a clear-cut regulatory framework. The legislative process has been painfully slow, leaving many potential investors and users to languish and stay on the sidelines. Worse, regulators have mostly used their discretion to discourage innovation with crypto. The banking agencies have basically frozen crypto out of the banking sector.
Understandably, many crypto advocates have grown increasingly frustrated with high compliance risk and lack of a clear regulatory framework. And some unfortunately have put their hope in a strange idea: a strategic reserve for digital assets.
In fact, that hope has gone so far that the president has signed an executive order to establish such a reserve. (Technically, it directs the treasury secretary to establish a “strategic bitcoin reserve” and a “digital asset stockpile.”) Naturally, the reserve fund was a big topic at the March 7 summit, but there are still many questions to be answered, especially regarding what’s next on the president’s agenda.
I’ll get to those in a bit, but first, there are some positive things in the executive order.
For instance, the order requires federal agencies to give a full account of all the digital assets they have. That’s something that’s sorely needed—nobody really knows how many digital assets the federal government currently possesses. Also, the fund will be created using only the digital assets the government already has acquired through seizures connected to enforcement actions, so there should be little to no additional cost to taxpayers.
More broadly, the order shows that the administration is embracing this technology, and that’s a big win for fans of the technology, especially those who want to see innovations in the payments sector. Ultimately, Congressional action is needed to produce a rational and durable regulatory framework for cryptocurrencies, and positive engagement with the White House should be a huge help.
Still, some significant questions remain.
For example, the executive order directs the treasury and commerce secretaries to “develop strategies for acquiring additional Government [bitcoin] provided that such strategies are budget neutral and do not impose incremental costs on United States taxpayers.” It is not at all clear what those strategies might entail.
And while the order does say the government won’t acquire additional digital assets “other than in connection with criminal or civil asset forfeiture proceedings,” it also includes a huge caveat. The escape clause is that the government will limit its digital asset acquisition in this manner unless there is “further executive or legislative action.”
On the executive side, the administration has so much discretion that it’s very hard to predict what a new order could say about future acquisitions. But the government should not be in the business of picking which assets are “good,” or which groups of investors to prop up, so the question of how to acquire new digital assets is no small problem. (And that’s even setting aside any potential conflicts of interest.)
Cryptocurrency will only become widely accepted if people use it for transactions. Buying a bunch of it and storing it in a digital vault does nothing to promote that kind of use.
President Trump’s executive order steers the United States toward technological leadership while minimizing potential side effects on the U.S. dollar or prematurely embracing cryptocurrencies that have not reached meaningful scale.
The same goes for legislative action, in that it’s nearly impossible to predict what new ideas might arise. However, one recently introduced proposal is less than encouraging. Republican Sen. Cynthia Lummis of Wyoming has reintroduced legislation to have the government purchase millions of bitcoins to create a “strategic bitcoin reserve.” Though the Boosting Innovation, Technology, and Competitiveness Through Optimized Investment Nationwide (BITCOIN) Act purports to cost taxpayers nothing, it would increase the national debt.
Perhaps worse, the executive order grants special treatment to bitcoin, shunning all other digital assets from this potential future acquisition. There’s no shortage of problems that arise from allowing government officials to buy assets, problems that apply just as equally to crypto as to stocks and bonds. Aside from any potential conflicts of interest for government officials who might gain financially, allowing officials to pick winners and losers in this manner undermines innovation, competition, and consumer choice.
Still, all these problems primarily focus on the potential costs of establishing a digital asset reserve fund. The benefit side of the equation—or to be more accurate, the lack of a benefit—is what makes the reserve fund idea so strange.
The reserve fund itself is an outdated idea, and there’s no strategic interest in owning something that there’s no good reason to own. Moreover, ever since the 1970s collapse of the Bretton Woods system of monetary management, there has been no obligation for the United States to maintain any international fixed exchange-rate system. Add in the dominant status of the dollar, and the U.S. doesn’t really have to hold any foreign currencies.
The elephant in the reserve room is, of course, gold. Yes, the United States stores a bunch of gold at Fort Knox, Kentucky. The new White House “crypto czar,” David Sacks, even likened the new reserve fund to “a digital Fort Knox for the cryptocurrency often called ‘digital gold.’”
The first problem is that, objectively, there’s no economic reason to have all that gold stored at Fort Knox. Gold hasn’t supported the value of the U.S. dollar since 1971, and the value of any fiat currency (including the dollar) depends on the real demand for it and the amount supplied. It’s not a function of the government’s commodity stores.
There’s also no good reason to have a bunch of assets in storage that can be sold to get more dollars. The U.S. government can do that with the press of a few buttons.
The gold at Fort Knox is little more than a relic of days gone by, and the United States would be just as well off without it. It would make no sense to create a digital version of that gold stock even if bitcoin was explicitly named “digital gold” in its source code.
The death knell for this idea, though, is that cryptocurrency will only become widely accepted if people use it for transactions. Buying a bunch of it and storing it in a digital vault does nothing to promote that kind of use.
Still, there’s a golden opportunity here. Two major issues have held broader acceptance of crypto back, and presidential leadership would go a long way to solving both.
First, anyone using crypto for commercial transactions is subject to capital gains taxes. The cleanest solution would be to get rid of capital gains taxes altogether, or at least removed for transactions conducted with alternative currencies.
Opposing Debate
Second, the United States has led the way in implementing an incredibly inefficient anti-money laundering regime, one that ignores some of Americans’ basic constitutional rights.
The roots of this regulatory regime are in the Bank Secrecy Act of 1970, and it was controversial from the very beginning. As it stands, Americans have no Fourth Amendment protections when they transact with a bank or other financial institution; law enforcement does not need a search warrant to obtain customers’ financial records.
This anti-money laundering regime has been a huge hindrance to crypto firms, both in practical and political terms. It’s outdated, costly, and runs over Americans’ Fourth Amendment protections. Banks and traditional financial institutions have been co-opted into this regime, and it’s the reason that peer-to-peer crypto transactions have been viewed so negatively by those institutions and by law enforcement. Sen. Elizabeth Warren, for example, has regularly bashed crypto as being little more than a playground for criminals, ignoring the fact that when criminals use crypto, they leave a better trail for law enforcement than when they use paper currency.
If a sitting U.S. president would even acknowledge these two problems, it would go a long way to helping crypto move off the sidelines. If he worked with Congress to fix these two problems, crypto might even achieve wider acceptance. Either option would be much better for crypto than building a digital Fort Knox.
