Senator proposes replenishing Bitcoin reserves with gold: Here’s how it will work

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As a seasoned researcher with over two decades of experience in financial markets, I find Senator Cynthia Lummis’ suggestion to convert gold reserves into Bitcoin intriguing and thought-provoking. While I have always admired her forward-thinking approach to cryptocurrencies, I am somewhat skeptical about the practicality and stability of such a move.

Senator Cynthia Lummis of the Republican party proposes that transforming some gold reserves into Bitcoins may bolster the financial position of the U.S. government.

During a conversation with CNBC, Lummis proposed a plan where the Federal Reserve could sell part of its gold reserves, valued according to 1970s prices, and then invest the earnings in Bitcoin (BTC).

See the clip below.

Senator Lummis, who is well-known for her enthusiastic backing of cryptocurrencies, proposes that establishing a strategic Bitcoin reserve might bolster the U.S. dollar‘s status as the global reserve currency, potentially lessening our national debt obligations.

She also suggested that Bitcoin, which is edging toward $100,000, could provide high returns.

As a crypto enthusiast, I see Bitcoin as akin to digital gold – a benchmark asset. Building a tactical reserve of this digital gold seems like a crucial move towards its effective deployment. This was the gist of Senator Lummis’ explanation.

“We possess assets at our 12 Federal Reserve banks, which include gold certificates that can be swapped for their current market value. These assets are recorded on the books based on their 1970s worth. By exchanging them for bitcoin instead of new dollars, we could create this reserve without printing additional money.

Senator Cynthia Lummis

As the Trump administration shows increasing curiosity towards cryptocurrencies, Senator Lummis hinted that drafting laws concerning digital assets might commence within the next few years.

How the Bitcoin reserve works

Establishing the Bitcoin Stability and Asset Protection Fund is a broad endeavor designed to bolster our country’s financial security and safeguard our national resources.

As an analyst, I’ve been delving into the details of the proposed BITCOIN act, sponsored by Senator Cynthia Lummis. Here’s a simplified breakdown:

— Julian Fahrer (@Julian__Fahrer) November 19, 2024

The Bitcoin Reserve Strategy serves as a safe financial instrument, enabling both the government and various organizations to invest in Bitcoin for long-term financial growth.

In simpler terms, this reserve will feature a dispersed data storage system. By establishing a dispersed system of safe Bitcoin vaults nationwide, the U.S. aims to safeguard assets from centralized threats and weaknesses. These vaults will be located in various regions, minimizing reliance on any single location.

Bitcoin purchase program

Over the next five years, the government intends to buy approximately 200,000 Bitcoins annually, with a total aim of accumulating 1 million Bitcoins in its strategic reserve. This regular purchasing strategy is designed to maintain stability in Bitcoin’s price and ensure a steady increase in the reserve.

All purchased Bitcoin will be held in the reserve for at least 20 years.

Furthermore, all existing Bitcoins held by various government entities will be moved to a centralized strategic reserve, enhancing control and facilitating effective management of these assets. Governments have the option to join this reserve by establishing separate accounts where they can deposit or withdraw their Bitcoin holdings at their convenience.

Support for this initiative arises from the fact that government entities have no power to take away or claim control over legally-owned Bitcoin holdings. This assurance encourages and motivates Americans to securely store their Bitcoins individually, fostering trust and promoting investment in digital currencies.

Bitcoin reserves will not solve the U.S. national debt problem

According to Avik Roy, the head of the research organization called Foundation for Research on Equal Opportunity (FREOPP), he’s uncertain if establishing a strategic Bitcoin reserve would effectively address the U.S.’s ongoing financial predicament, which is related to its debt issues.

At the North American Blockchain Summit 2024 held in Dallas, Avik Roy stated that Lummis’s proposed plan would not be sufficient to address the escalating national debt, currently standing at an astounding $35 trillion.

Although the Bitcoin reserve seems beneficial, it doesn’t directly address our issue. It’s crucial to implement actual budgetary reforms in order to tackle our persistent annual federal deficit of around $2 trillion.

Avik Roy, FREOPP president

Based on Roy’s explanation, having a Bitcoin reserve wouldn’t be enough for the U.S. to solve its annual $2 trillion federal deficit problem. Instead, it would require significant budgetary changes or reforms as well.

The political scientist noted that the BTC reserve could ease tensions in the bond market by making it feel like the U.S. is not going broke. Roy is also concerned that the U.S. could abandon its BTC reserves in the future, similar to what happened with gold in the 1970s.

The argument against Lummis

Bitcoin serving as a reserve asset raises various concerns, with the most significant issue being its high volatility. Compared to secure alternatives such as gold, Bitcoin’s price instability makes it a less reliable choice for long-term storage of value.

After all, Bitcoin has experienced several notable crashes throughout its history.

  • In June 2011, when the Mt. Gox exchange was hacked. Bitcoin’s price dropped from $32 to $0.01 in a single day, a nearly 99.9% collapse.
  • December 2017 to February 2018: After hitting a peak of nearly $20,000, Bitcoin lost over 56% of its value within months.
  • March 2020: During the onset of the COVID-19 pandemic, Bitcoin’s price fell nearly 46% in less than a month, dropping from $10,300 to about $5,600.
  • May 2021: Bitcoin dropped over 40% in two weeks, from $58,000 to $34,700.
  • November 2022: Following the collapse of the FTX exchange, Bitcoin experienced a 14% dip in a short period

Bitcoin is often linked to illegal transactions and secret purchases, which stirs doubts about its compatibility with national financial structures. Critics argue that it might provide nations such as Russia a means to dodge international sanctions, disrupt the global financial order, foster geopolitical conflicts, or even serve as a tool for money laundering.

Trump’s crypto advisory board to create promised reserve

Several digital currency firms like Ripple, Kraken, and Circle have expressed interest in joining the potential cryptocurrency advisory panel proposed by President Donald Trump, according to Reuters. They are keen to contribute their expertise towards the president’s efforts to reform U.S. policies related to this sector.

At a Bitcoin gathering in Nashville back in July, Trump declared his intention to establish a fresh advisory body within an administration supportive of cryptocurrencies. Discussions are currently underway among Trump’s advisers regarding the structure, personnel, and membership of this council.

Prospective participants could be venture capital firm Paradigm and Andreessen Horowitz’s cryptocurrency division, often referred to as a16z Crypto.

The details are still being worked out, but I expect top-tier executives from American bitcoin and cryptocurrency companies to attend.

David Bailey, CEO of Bitcoin Magazine

Based on various reports, this team is anticipated to provide recommendations for digital asset policy, engage in cryptocurrency lawmaking with Congress, establish a Bitcoin reserve as pledged by Trump, and cooperate with departments such as the Securities and Exchange Commission, Commodity Futures Trading Commission, and Treasury Department. A source revealed that members of law enforcement agencies, former politicians might also be part of the team’s board.

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2024-11-23 23:54