Cryptocurrencies promise to be fundamental to Donald Trump’s economic policies. One of his most controversial proposals is the creation of a strategic bitcoin reserve, which could trigger a new world economic order.
The creation of a strategic bitcoin reserve (SBR) by the hand of Donald Trump It would involve the US purchasing large quantities of the cryptocurrency over the next few years to keep it as a reserve – similar to the country’s strategic oil reserve.
The main doubts regarding this plan are centered on how the SBR would work; and whether Trump will be able to carry out this proposal.
However, there is – as the note – potentially an even bigger idea at play – a significant change in the world economic orderin which new actors and new forms of currency begin to assume an increasingly greater role.
The main defender of an SBR, the Republican senator Cynthia Lummisproposed that the US acquire 200,000 bitcoins per year for five years.
But a more likely first step is to designate the roughly 207,000 bitcoins already held by the United States as a reserve to be held by the U.S. Treasury. Any additional bitcoin acquisitions would require a changing the law and the consent of the US Treasury, which currently opposes.
As for the question of whether Trump can fulfill his promise, it is unclear whether a federal-level SBR would have the votes needed to pass the House of Representatives, the US lower house.
However, according to The Conversation, there are already 13 US states that are actively considering or have proposed legislation to establish an SBR.
Pros
From an economic point of view, one of the main arguments is that an SBR can function as a cover to protect a country’s wealth against inflation and currency devaluation.
While 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 exceed 21 million), which potentially limits its devaluation.
Thus, advocates say an SBR could act as a relatively safe store of wealth, in the same way that gold reserves currently are. It is for this reason that bitcoin has been nicknamed .
Another popular argument is that the monetary value of SBR could appreciate quickly and thus pay off the US national debt. However, this too is a largely theoretical and untested argument, as the exact mechanisms remain unclear.
Contras
On the other hand, some analysts fear that an SBR could undermine confidence in the dollar, leading to financial instability.
If bitcoin were to be widely adopted as the world’s reserve currency, for example, this could destabilize the position of the dollar as the world’s main reserve currency.
Of course, this instability could be worsened by the historical volatility of bitcoin prices. This saw, for example, its price soar from around $3,800 (£3,126) at the start of 2019 to almost $68,000 in November 2021. It then lost almost half its value by the end of January 2022, falling to around 35,000 dollars. But today it is over 95,000.
3 trends that changed history
As The Conversation explains, the post-World War II 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 value of the dollar.
The fixed rate system was abandoned in the 1970s, but US dominance was maintained through the petrodollar system, in which oil was priced in dollars. The role of the dollar as the world’s reserve currency and the influence of the US in international institutions such as the IMF and the World Bank have reinforced this dominance.
However, over the past two decades, three overlapping trends have threatened to dislodge the dollar’s dominance.
In the first place, 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 fact is putting the US position as the sole superpower at risk and reshaping the geopolitical landscape. While recording rapid economic growth, these countries have also increased their leadership role across the world.
The second trend has been the decentralization of the financial system and the increase in “private money”particularly in response to the global financial crisis of 2007-08. Private money refers to any token currency 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 archetype of private money.
In addition to the shift to private money, there is a third trend. This is where governments give private actors like cryptocurrency providers and exchanges significant control – “infrastructural power” -, in an attempt to achieve public policy objectives using the financial tools and services provided by these actors. This is a big change from the old order in which governments had more direct authority.
Cryptocurrency “arms race”
The reports that Trump made encryption a priority signal the next step in this change.
The balance of power is shifting away from states and toward the companies that block cryptocurrencies, the exchanges on which cryptocurrencies are traded, and the owners of cryptocurrency exchange-traded funds.
This could be a decisive moment.
If the US, another major economic power, or a number of major emerging economies (such as 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 cause country after country to rush to shore up their reserves.
There are already reports in the media that other nations, including Japan, Russia and China, are accumulating bitcoin ahead of a possible SBR announcement by the US. And Trump even indicated he might revoke a controversial crypto accounting rule that would allow banks to hold more bitcoin.
New global economic order
These trends have the potential to reshape the global economic orderincorporating private money and the infrastructural power of private actors into a realm traditionally dominated by leading states and their national currencies.
Trump’s ambitions to create an SBR will underscore the growing role of private money in the world economy. But these changes to the global order are already underway – regardless of whether the new president’s plans for bitcoin come to fruition.
