This situation of rushing to pursue cryptocurrencies as reserve assets is not without potential risks. As more and more real economy assets and liabilities are denominated in cryptocurrencies, once cryptocurrencies encounter a liquidity crisis, in the absence of a lender of last resort, a large amount of virtual value may disappear. If not handled properly, it may lead to a terrifying situation of collateral collection and financing shortages in the market.
After Trump won the election, the cryptocurrency circle was jubilant, and Bitcoin and other currencies once soared. All walks of life focused on the future trends and market prospects of various cryptocurrencies, as well as the anticipation of Trump’s favorable cryptocurrency policies after he took office next year. However, Trump’s strong support for cryptocurrencies and the potential impact on the existing global monetary system have received relatively little attention and mention.
The results of this US election are undoubtedly a turning point for the development of cryptocurrencies in the United States. Trump’s election is generally believed to mean that US regulators will be open to digital currencies. People in the currency circle have pointed out that this marks a “huge victory for cryptocurrencies.” After all, cryptocurrencies have been subject to considerable hostility during the past four years of the Democratic Party’s rule.
Trump was not originally a supporter of cryptocurrencies. He denounced Bitcoin as a “scam” in 2021, just to win financial support from people in the cryptocurrency circle in this election. Recently, he turned to support cryptocurrency and reshaped himself as a strong supporter of cryptocurrency. During the campaign, he vigorously promoted the benefits of Bitcoin to the US economy.
For example, at a Bitcoin conference held this summer, Trump, as a presidential candidate, promised to establish a “Bitcoin Strategic Reserve” after being elected, and to make the United States a “world Bitcoin superpower” by introducing more Bitcoin mining businesses to the United States. He also vowed at the meeting to fire Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC) on his first day in office.
Gensler is a strong critic of cryptocurrency, advocating that most cryptocurrency projects should be included in the supervision of the SEC, and has instructed to sue Binance, Coinbase, Ripple, Cumberland and other cryptocurrency giants that violated securities laws.
As Congress has been unable to reach a consensus on legislation for crypto assets and issue clear regulations, the SEC under Gensler’s leadership will introduce new accounting rules in 2022, requiring institutions that hold digital tokens for their clients to list these tokens as liabilities in their own balance sheets, which will more or less create obstacles for major local banks and fund managers to enter the cryptocurrency market. With the election results showing that both houses of Congress will be controlled by the Republicans, it is generally expected that this obstacle rule will be repealed, and those pending lawsuits against cryptocurrency companies are also expected to be “suspended”.
As for the removal of Gensler, considering that the SEC is an independent agency, it is not easy for Trump to fulfill his promise from a legal point of view, and Gensler’s term will not end until July 2026. However, there is a view that the Trump administration is likely to try to let the Commodity Futures Trading Commission replace the SEC as the cryptocurrency market regulator to reduce the government’s control over the cryptocurrency market.
In any case, the regulation of the cryptocurrency market is expected to be greatly weakened after Trump enters the White House, which will pave the way for more investment and wider use of cryptocurrencies. The challenge facing cryptocurrencies is that they are still cumbersome to use directly, and cannot be used to buy necessities or pay taxes. The actual use of cryptocurrencies has not increased significantly in the past few years. According to the Pew Research Center, the use of cryptocurrencies in the United States will remain unchanged at about 16% to 17% between 2021 and 2024. The lack of widespread confidence and trust in Bitcoin technology may be a major factor limiting the wider adoption of cryptocurrencies.
Deregulation coupled with measures to strengthen cryptocurrencies as a means of storing value will undoubtedly bring further attention and attention to such assets. The “Bitcoin Strategic Reserve” that Trump has promised to create is an important measure to strengthen the means of storing value. Since he has not yet elaborated on how this novel strategic reserve will be promoted, the impact has not yet been clearly assessed. So far, the blueprint for reference is the “Bitcoin Act of 2024” proposed by Republican Senator Cynthia Lummis, who strongly supports the reserve plan, as early as July.
Under her proposal, the US government will purchase no more than 200,000 bitcoins per year for five years. The minimum holding period for these bitcoins is 20 years, and sales are restricted except for repayment of federal debt instruments. The funds for purchasing these bitcoins will come from the Federal Reserve Bank’s discretionary surplus funds, the proceeds of remittances to the US Treasury, and the proceeds of the revaluation of gold certificate holdings. In addition, the government agencies holding the seized bitcoins cannot sell them and must transfer them to the Bitcoin Strategic Reserve.
It can be foreseen that if the Trump administration establishes a “Bitcoin Strategic Reserve”, it will have a certain impact on the existing global monetary system. The status of Bitcoin as a reserve asset will be established, which will trigger other countries to follow suit and include Bitcoin in their foreign exchange reserves. Driven by Bitcoin, the proportion of the total value of global cryptocurrencies to the total global foreign exchange reserves will inevitably increase, and then become a more important asset class than it is now. According to Google’s daily pricing update, the current total value of global cryptocurrencies is US$3.13 trillion (about S$4.19 trillion), equivalent to nearly 20% of the total global foreign exchange reserves.
As Bitcoin’s status rises at the national level, more U.S. institutions and companies are expected to revise their accounting treatment for holding Bitcoin, helping them follow the steps of a few listed companies such as Tesla and Microstrategy that have Bitcoin as reserves.
Of course, this rush to embrace cryptocurrencies as reserve assets is not without potential risks. Trump’s “Bitcoin Strategic Reserve” concept is based on the relaxation of cryptocurrency market regulations, which will inevitably lead to a corresponding weakening of the status and functions of the central bank and relevant financial regulatory agencies. As more and more real economy assets and liabilities are denominated in cryptocurrencies, once a cryptocurrency liquidity crisis occurs, in the absence of a lender of last resort to rely on, a large amount of virtual value may disappear. If not handled properly, it may lead to a terrifying situation of collateral collection and financing shortages in the market.
In short, Trump’s strong support for cryptocurrencies may have a large or small potential impact on the existing global monetary system, depending on how much he delivers on his promise to support cryptocurrencies during his term in office.
(The author is a local current affairs commentator)
