Testing Trump's ‘Bitcoin Reserve’ Idea

Once a crypto sceptic, former U.S. president Donald Trump is now a convert to the crypto-verse. Close on the heels of presidential elections in the U.S., the Republican nominee injected fresh hopes into the struggling crypto community as he promised to bring it into the mainstream with the so-called sovereign “Bitcoin Reserve” -- just like gold or oil. Trump’s idea of a bitcoin strategic reserve, called a ‘master stroke’ by crypto utopians, has policymakers and economists divided, with many fearing its potential to undermine dollar dominance.

Trump's July 27 address at the Nashville Bitcoin Conference, where he vowed to make the U.S. a "crypto capital" or "bitcoin superpower" of the world if voted for the Oval Office again, has ignited a fresh debate around the highly volatile digital currency. "If crypto is going to define the future, I want (it) to be mined, minted and made in the U.S.A...," he said, proposing to reserve “100% of all the bitcoins” the U.S. government currently holds. Predicting bitcoin would surpass gold's $16 trillion m-cap, Trump said he would use it to pay off the U.S.’ $35-trillion debt. The jury, however, is still out if such a move is even feasible.

Crypto cynics are certainly not sold on the idea. They call it a "political move" by Trump to garner more funding as he heads to the final election campaign phase. Stakeholders say central banks would not want it. “Trump’s idea stems from the fact that BTC might become a global reserve. Unfortunately, I don't think it would be acceptable for major central banks, as they could lose control over monetary policies,” says Krishnendu Chatterjee, co-founder and CEO of A2Z Crypto.

Trump is not the only one in the U.S. rallying behind crypto. U.S. Senator Cynthia Lummis has introduced a bill, which mandates the U.S. government to buy at least 5% of total bitcoins (around 1 million). Independent presidential hopeful Robert F. Kennedy Jr. wants the U.S. to buy at least 4 million bitcoins. The U.S. House of Representatives recently passed a bill that'll provide regulatory clarity on crypto. The intention is clear -- to regulate crypto like other asset classes and use strategic reserves for its advantage. "By positioning bitcoin alongside traditional assets like gold and oil, the U.S. can diversify its reserves, offering a hedge against currency devaluation. The move could lead to a more stable dollar," says Edul Patel, CEO & co-founder, Mudrex.

Who owns largest chunk of bitcoins?

The U.S. holds the highest $11.1 billion worth of bitcoins (around 2,05,515 BTC), mostly via black market seizures by the FBI, as per data by crypto intelligence firm Arkham Intelligence. China follows with confiscated bitcoins at 1,94,775.

The U.K. and Germany's cache of seized bitcoins is 61,000 and 50,000, respectively. Few select ones are a step ahead. Bitcoin holds a legal tender status in Al Salvador and the Central African Republic. El Salvador bought 2,546 BTC for 108 million, and, as its President Nayyib Bukele announced in 2022, the country buys at least 1 bitcoin every day. Since the war against Russia, Ukraine has received bitcoin donations worth $22.8 million, and its public officials estimatedly own over 46,000 BTC. India's neighbour Bhutan is heavily into Bitcoin mining. Its government wants to leverage cheap hydroelectric power in the country to mine more bitcoins. “(Such a move) opens up an interesting future for digital assets in global economics. This is especially valid for countries with a high retail adoption of crypto (India, U.S., etc.),” says Vikram Subburaj, CEO, Giottus Crypto Exchange.

Besides, listed, and non-listed companies and ETFs in the U.S. also hold the highest crypto assets. Michael Saylor's Microstrategy holds about 2,26,500 bitcoins worth $13.2 billion, according to Bitcoin Treasuries data. Mt. Gox among private companies owns the largest share of 2,00,000 BTC valued at $11.7 billion. ETFs in the U.S. manage the largest share of Bitcoins across categories. iShares Bitcoin Trust of Blackrock holds 3,48,609.2 BTC worth $20.4 billion. Marathon Digital Holdings Inc. tops among mining companies with 24,962 BTC. Of the total limited quantity (19.7 mn) of bitcoins, only 1.2 mn are left to be mined. “Being finite, easier to store and globally acceptable (yet to happen) might give BTC the legitimacy, to act as a reserve asset,” says Chatterjee of A2Z Crypto. Mudrex’s Patel says as the U.S. holds 1% of the total bitcoins and 40% of its population invested in crypto, Trump’s initiative could “reinforce the nation’s financial stability”.

But is such a move possible?

Cash and gold help countries with non-U.S. dollar currencies, especially in times of financial crisis. “Once reserves are formed, they can be used for cross-border trade that is not pegged in US dollars. Bitcoin might prove to be the neutral currency that governments agree on,” says Subburaj of Giottus. As for who will manage such a reserve, experts say the central bank could manage bitcoin reserves like gold or oil, with some powers from the government. However, how this will pan out in reality is still unclear. If governments reserve crypto like gold or oil, it would shore up prices but also mean fewer BTCs for trade. This could make a volatile currency even more “vulnerable” to fluctuation. Moreover, killing the whole idea of “decentralised currency” by controlling it, might make it less attractive. Fears are if the U.S. and other superpowers join the Bitcoin race, it may lead to “concentration” of power.

Major central banks are still sceptical about crypto. The U.S. Federal Reserve has not decided whether to pursue or implement a central bank digital currency or CBDC but is still exploring its potential benefits and risks. The RBI started exploring CBDC or e-rupee in 2022, but warned investors regarding its "lack of accountability and stability". According to the Atlantic Council, only 3 countries have fully launched a CBDC so far — the Bahamas, Jamaica and Nigeria. 19 of the G20 countries are in advanced stages and 36 have ongoing CBDC pilots.

Where does India stand?

Indian government’s approach to crypto also remains “cautious”. Cryptos are not regulated in India, meaning investors trade at their own risk. The government says it has no plans to bring a law to tax crypto transactions -- though there's a 30% tax on overall profit and 1% TDS -- leaving its future uncertain in India. “India has, however, been progressive in its stance to bring common regulations for the asset class under its G20 presidency,” says Subburaj of Giottus.

Crypto players say hope’s still alive. The developments in the U.S. could have positive effects across the world. “India must seize (the moment), especially following its proactive role during the G20 presidency,” says Balaji Srihari, business head, CoinSwitch, adding that prioritising security, self-custody, and education is also equally paramount. Trump’s idea has certainly boosted investors' and stakeholders’ confidence. Is it just the U.S. version of a ‘Jumla’ or game-changer for the struggling new-age industry? The picture will be clear in the months ahead.