Trump’s plan for a strategic bitcoin reserve could trigger a crypto ‘arms race’ and reshape the global economic order - Insurance News | InsuranceNewsNet

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January 15, 2025 Newswires
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Trump’s plan for a strategic bitcoin reserve could trigger a crypto ‘arms race’ and reshape the global economic order

Huw MacartneyThe Conversation

Cryptocurrencies promise to be central to Donald Trump’s economic policies in his second term as US president. Arguably his most controversial proposal is the creation of a strategic bitcoin reserve (SBR). This would involve the US buying up large amounts of the cryptocurrency over the coming years to hold as a reserve, similar to the country’s strategic petroleum reserve.

But there has been debate between advocates of the plan and sceptics like Federal Reserve chair Jerome Powell. The main political questions have centred around what an SBR would look like and whether Trump will even be able to deliver on this proposal.

However, there is potentially an even bigger idea in play – a significant shift in the global economic order, where new players and new forms of currency begin to take an ever-larger role.

The main advocate of an SBR, Republican senator Cynthia Lummis, has proposed that the US acquires 200,000 bitcoin a year for five years.

But a more likely first step is to designate the approximately 207,000 bitcoin already held by the United States as a reserve to be held by the US Treasury. Any additional large purchases of bitcoin would require a law change and the assent of the US Treasury, which is currently opposed.

On the question of whether Trump can achieve his pledge, it is unclear whether an SBR at the federal level would have the votes to pass through the House of Representatives, the US’s lower chamber. However, there are already 13 US states that are actively considering or have proposed legislation to establish a SBR.

Economically, however, one of the main arguments is that an SBR can act as a hedge to protect a country’s wealth against inflation and currency devaluation. Whereas typical currencies can be printed at will by central banks, causing their value to decrease, there is a fixed supply of bitcoin (the number in circulation cannot pass 21 million), potentially limiting its devaluation.

So advocates say an SBR could act as a relatively safe store of wealth in much the same way as gold reserves are now. It is for this reason that bitcoin has been labelled “digital gold”.

Another popular argument is that the monetary value of the SBR could appreciate rapidly and hence pay down US national debt. This too is largely a theoretical and untested argument however, and the precise mechanisms remain unclear.

On the other hand, some analysts are concerned that an SBR could undermine confidence in the dollar, leading to financial instability. If bitcoin were widely adopted as a global reserve currency, for example, this might destabilise the dollar’s position as the world’s primary reserve currency.

Of course, any such instability may be heightened by bitcoin’s historic price volatility. This saw, for example, its price soar from around US$3,800 (£3,126) at the start of 2019 to nearly US$68,000 in November 2021. It then lost almost half of its value by late January 2022, falling to about US$35,000. But today it is above US$95,000.

Beyond these concerns, however, the SBR highlights a more fundamental, era-defining shift – one that is already under way.

To understand this shift, it is helpful to place the rise of cryptocurrencies in context. The post-second world war order was initially structured around a dollar-dominated system – with the US dollar pegged to gold and a host of other currencies pegged to the dollar. This provided stability and confidence in the dollar’s value.

The fixed-rate system was abandoned in the 1970s, however US dominance was retained through the petrodollar system where oil was priced in dollars. The dollar’s role as the world’s reserve currency and the US’s influence in international institutions like the IMF and World Bank reinforced this dominance.

But three overlapping trends have threatened to dislodge the dominance of the dollar over the past two decades. First, the rise of emerging economies such as Brazil, Russia, India, China, South Africa and others (the BRICS+) is creating a more multipolar global system. This is challenging the US’s position as the sole superpower, and reshaping the geopolitical landscape. While experiencing rapid economic growth, these countries have also increased their global leadership roles.

The second trend has been the decentralisation of the financial system and the rise of “private money”, particularly in response to the global financial crisis of 2007-08. Private money refers to any token used as money that is not backed or controlled by a sovereign or central bank. In this sense cryptocurrencies – which operate independently of traditional central bank and treasury money supply mechanisms – are the archetypal private money.

Besides the shift towards private money lies a third trend. This is where governments give private actors like crypto providers and exchanges significant control (“infrastructural power”) in a bid to achieve public policy goals using the financial tools and services provided by these actors. This is a big change from the old order where governments had more direct authority.

A crypto arms-race?

Reports that Trump has made crypto a priority signal the next step in this shift. The balance of power is moving away from states and towards companies that block-hold cryptocurrencies, exchanges upon which cryptocurrencies are traded, and the owners of exchange-traded cryptocurrency funds.

This could be a watershed moment. If the US, another leading economic power (like China), or a series of larger emerging economies (like the rest of the BRICS) become block-holders of bitcoin or other major cryptocurrencies, it could trigger the emergence of a cryptocurrency “arms race” on a global scale. This would see country after country rushing to bolster their reserves.

There are already media reports that other nations, including Japan, Russia and China, are accumulating bitcoin ahead of a possible SBR announcement by the US. And Trump has even indicated that he might repeal a controversial crypto accounting rule that would allow banks to hold more bitcoin.

These trends have the potential to reshape the global economic order, by incorporating private money and the infrastructural power of private actors into a realm traditionally dominated by leading states and their national currencies.

Trump’s ambitions for an SBR will underline the growing role of private money in the world economy. But these shifts in the global order are already underway – regardless of whether the new president’s plans for bitcoin are realised.

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