TLDR: Polymarket gives the Bitcoin Strategic Reserve (BSR) a 34% chance of becoming policy in the months after Trump will take office. Proponents see the BSR as a way to counter the mounting debt of the US, diversifying the nation’s reserves and strengthening the credibility of the U.S. fiscal position. But there are opponents that claim the exact opposite will happen: that the BSR will turn out to be the hole that will threaten to sink the ship called the US dollar.
Many influential figures in American politics, including Robert F Kennedy Junior and Republican Senator Cynthia Lummis (and of course Michael Saylor), have suggested the idea that the United States should create a strategic reserve of BTC. A law has even been proposed: Lummis’ Bitcoin Act is a lofty document that translates to: ‘Wouldn’t it be fun if the US is buying Bitcoin and it scares China and Russia so they start buying Bitcoin and we have an arms race over Bitcoin instead of over weapons?’
A recent paper by the Bitcoin Policy institute reads:
‘SBR could provide option value against monetary devaluation and debt instability, diversifying the nation’s reserves and strengthening the credibility of the U.S. fiscal position, financial system, and global influence.’
These are in short the pro arguments.
Putting BTC on the balance sheet no longer is a fringe idea. Polymarket thinks it’s a 34% chance it might happen soon after Trump takes office.
But wait, didn’t Jerome Powell just block this possibility?
Did Jerome Powell Just Block the Possibility of an SBR?
But wait, didn’t Jerome Powell just block this possibility? Last week, at the latest meeting of the interest rate announcement, Fed Chairman Jerome Powell explained the central bank’s latest interest rate decision. Powell was asked about his thoughts on Trump’s Bitcoin plans during the Q&A session. His response: “We’re not allowed to own bitcoin.” And also: “We’re not looking for a law change at the Fed.”
This made headlines, of course. But delving a bit deeper in the matter, it is not the radical statement you might think it is. What is the Fed actually saying? Powell’s comment about Bitcoin is not at all extraordinary: it is in line with how the Fed talks about gold.
The Federal Reserve does not own gold. The Fed is just a custodian. They manage gold bars for all kinds of owners, one of which is the U.S. government. Only a fraction of U.S. gold is at the Fed. The rest is in the vaults of the Treasury Department. A similar setup would be on the table for the SBR: the proponents would not want the Fed, but another government agency to manage the purchase and storage of Bitcoin.
What Exactly is Strategic about a Strategic Reserve?
There is a difference between keeping a stockpile of confiscated BTC and actively acquiring more. The United States currently hold 200.000 BTC seized in law enforcement operations. What Trump has proposed is to not sell this stockpile. But that is not the same as buying extra BTC for strategic reasons.
What does strategic mean in this context? Well, the USA have strategic reserves of commodities such as oil. The Strategic Petroleum Reserve acts as a means to stabilize oil markets. The government also holds certain rare minerals, grain and medical equipment strategically, amongst other commodities. These strategic assets have a function in hard times.
So what about its gold reserves? Are these strategic? Not really. Gold doesn’t really play a role in the financial system anymore, even though central banks still hold it. Financial journalist Byron Gilliam from Blockworks says it like this:
“Gold is not strategic: The government’s stockpile of gold is a functionless anachronism that has no bearing on the value of the US dollar. The government hasn’t added to its gold holdings in decades so why would it add digital gold now?”
Which brings us to our next point. As the dollar has functioned for decades without gold backing, why would the dollar need BTC to back it?
Will a BTC Backing Strengthen or Weaken the Dollar?
Trust is a funny thing. When Terra stablecoin (UST) founder Do Kwon started buying BTC in 2022 to back up his algorithmic stablecoin, the coin imploded just weeks later. There wasn’t enough BTC to back the entire market cap of UST. So the act of creating a reserve only highlighted the fact that UST wasn’t backed by anything.
The US dollar isn’t backed by gold but, roughly speaking, by the might of the American economy and the American army, which acts as world police to protect global trade – which takes place in dollars.
The dollar still reigns supreme as the world reserve currency. Its position isn’t really threatened. If anything, its position is too strong.
In a long article in Bitcoin Magazine, Nic Carter voices his main critique on the SBR. Carter’s argument is that holding a Bitcoin reserve would not strengthen the dollar. Unlike other nations, the US issues the global reserve currency. While other countries might experiment with strategically acquiring Bitcoin—some already are—the situation is different for the US.
For countries like Russia or Iran, it might make sense to consider an unseizable asset for their foreign exchange reserves, especially in light of the US freezing Russia’s treasuries in 2022. However, the US has no need to hedge its exposure to the dollar—it is the issuer of the dollar.
If the US were to acquire Bitcoin and assign it a monetary role—whether as foreign exchange reserves or something more substantial—it would signal a loss of confidence in the current dollar-based system. As Benjamin Franklin said: A small leak will sink a great ship.
Indeed, it’s interesting to think through what might happen in a scenario where the US has adopted or is very close to adopting a Strategic Bitcoin Reserve. Nic Carter:
“I would suspect that the market would treat the Bitcoin purchases not as symbolic, but rather as the first step in a process of returning to a new commodity standard for the dollar with Bitcoin, rather than gold, as the backing.”
This would, according to Carter, accelerate the demise of the dollar. It would signal to the world that the US does not intend to manage its fiscal situation well and will likely re-denominate in BTC at some point.
What would happen in concrete terms? Carter:
“Interest rates would spike dramatically as investors in US debt would start to wonder if the US was considering a hard break with Bretton Woods II.
The cost of capital for everyone on the planet would rise sharply. Inflation would likely ramp up. A massive redistribution of wealth would occur, as financial markets tumbled, and Bitcoin skyrocketed.
Put another way, the US considering a near term abandonment of the current, relatively stable monetary system and replacing it with a monetary standard not based on gold, but a highly volatile, emerging asset, would cause utter panic among its creditors.”
Conclusion
In short: according to the con camp that Carter belongs to, there is a) no urgency to back the dollar with something and b) the back would create use financial waves, threatening the US hegemony in finance. So while on its surface the idea of strategically acquiring Bitcoin may sound nice, when you realize how profound the consequences could be on global financial markets, there is a lot to be said against it. There is of course a caveat. Only if you consider hyper Bitcoinization inevitable, then it might indeed be a good idea to prepare for this scenario by setting up a strategic reserve.
Also read: Softwar or Limpwar: Will Nation States Engage in Hash Wars?
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
