Author: Stefanie Wayco, Matthew Catani
Compiled by: Baihua Blockchain
President Donald Trump is moving towards an executive direction that is friendly to cryptocurrencies. A clear signal is the appointment of David Sacks as the White House's head of artificial intelligence and cryptocurrency affairs.
This appointment has sparked widespread speculation about the role of the "head of cryptocurrency affairs": how will this role specifically operate? Will it have substantive policymaking power? Will it lead to a clearer regulatory framework? Is Sacks merely serving as an advisor without an official government title or authority? Or will this role drive the establishment of a new government cryptocurrency reserve?
A U.S.-backed cryptocurrency reserve could provide the much-needed clarity in this digital domain - such as which government agency will be responsible for regulating cryptocurrencies - paving the way for cryptocurrencies to be fully integrated into our daily consumption and investment, and promoting the application of blockchain technology in larger-scale government projects.
Bitcoin, as the most well-known digital asset, has long been seen as the industry standard. Trump has publicly voiced support for establishing a strategic Bitcoin reserve.
The new administration has an opportunity to lead an era that may be defined by innovation, digital credit, and global acceptance of Bitcoin and other cryptocurrencies, whether they are viewed as securities or commodities.
1. Digital Asset Diplomacy: How the Federal Reserve Can Leverage Cryptocurrencies 1) The Role of the Federal Reserve
As the nation's central bank, the Federal Reserve is responsible for managing monetary policy, controlling inflation, regulating financial institutions, ensuring the efficient operation of the payment system, and promoting consumer protection.
A hallmark of the Federal Reserve is its political independence, which allows it to focus on long-term economic stability. Some of its functions require close collaboration with other federal agencies, including the U.S. Treasury Department, the Securities and Exchange Commission (SEC), and the Federal Deposit Insurance Corporation (FDIC), to provide comprehensive oversight and stability.
For example, the Federal Reserve works with the Treasury Department to manage government debt issuance and bond market liquidity; collaborates with the SEC to enhance the stability of financial markets; and coordinates with the FDIC to safeguard deposits and maintain the integrity of the banking system.
To achieve its objectives, the Federal Reserve employs various tools, including adjusting interest rates to influence borrowing costs, conducting open market operations by buying and selling government securities, and setting reserve requirements to ensure banks maintain adequate liquidity.
2) The Vision for a Cryptocurrency Reserve
Trump's proposed cryptocurrency reserve plan - whether its goal is to enhance financial stability, curb inflation, manage national debt, or promote innovation - will require strategic collaboration, with the Federal Reserve being the most suitable institution to lead this process.
Similar to its role in managing traditional assets, the Federal Reserve's involvement in a potential cryptocurrency reserve could determine its success, ensuring it aligns with broader fiscal and monetary goals.
Furthermore, the new administration's embrace of cryptocurrencies also signals confidence in the Federal Reserve's ability to manage a cryptocurrency reserve.
A national-level cryptocurrency reserve can conceptually serve as a strategic asset, similar to traditional reserve assets like gold. Proponents argue that a cryptocurrency reserve could reduce national debt, free up dollars for other purposes, while positioning cryptocurrencies as long-term financial assets.
This reserve could also act as a stabilizing factor, providing credibility and trust in cryptocurrencies, regardless of whether digital assets are classified as securities, commodities, or currencies.
2. Cryptocurrencies as Commodities and a New Gold Standard 1) Historical Context and Standards
Financial standards play a crucial role in economic stability and consumer confidence. Historically, systems such as the gold standard have provided a fixed framework for valuing currencies, linking national currencies to a specific amount of gold.
Under the gold standard, currencies could be exchanged for gold at a fixed rate, providing stability and predictability to financial markets and trade. Central banks maintained gold reserves and limited the money supply in proportion to these reserves, promoting fiscal discipline.
Today, the U.S. government guarantees various securities through a "full faith and credit" system, even without physical backing, to ensure their reliability. This principle refers to the government's unconditional commitment to fulfill its debt obligations, thereby enhancing confidence in government-issued securities.
For consumers, "full faith and credit" makes investing in financial instruments like government bonds a safe and stable form of credit and investment, backed by the government's taxing power or money-creating ability.
From a policy perspective, "full faith and credit" facilitates efficient government financing through debt issuance. This system supports critical initiatives, such as infrastructure development and emergency relief programs, while ensuring access to capital markets.
Additionally, it provides a foundation of trust for the broader financial system, supporting policies aimed at promoting economic growth and enhancing economic resilience.
2) Cryptocurrency Plans: Towards Regulatory Clarity
Wyoming Republican Senator Cynthia Lummis has been a vocal proponent of the idea of establishing a national Bitcoin reserve. [1] Her plan envisions accumulating 1 million Bitcoins over 20 years to combat inflation and supplement the role of the U.S. dollar.
The proposal includes converting the Federal Reserve's gold certificates to Bitcoin and establishing a strategic reserve with a minimum 20-year holding period.
Future cryptocurrency frameworks will need to address issues such as property rights, ownership protection, and secure custody solutions, but most importantly, clarify which agency will be responsible for regulating cryptocurrencies and when and how they will be defined as securities or commodities based on the 1946 U.S. Supreme Court decision in SEC v. Howey.
Lummis' bill addresses these regulatory challenges, proposing clearer distinctions between securities and commodities to simplify compliance requirements for cryptocurrency businesses. The bill includes specific funding mechanisms and regulatory frameworks, transferring the oversight of some crypto assets from the U.S. Securities and Exchange Commission (SEC) to the U.S. Commodity Futures Trading Commission (CFTC).
As cryptocurrencies have risen, courts have been embroiled in disputes over whether certain digital assets are securities or commodities. This ambiguity has led to various and conflicting standards for the industry. [4] Therefore, a clearer overall regulatory framework for digital assets that can unambiguously accommodate cryptocurrencies is crucial.
While the Howey test will still apply, this 1946 test seems outdated for cryptocurrencies - something the courts at the time could not have foreseen.
Although digital assets themselves may not necessarily be securities, the new administration's recognition of the entire cryptocurrency industry and its acceptance of a cryptocurrency reserve could drive the establishment of a new regulatory framework that clearly delineates the boundaries between securities and commodities.
More definitive legal standards and frameworks will enable companies to better operate trading platforms to provide cryptocurrencies; allow institutional investors to be more compliant; empower consumers to confidently buy, sell, and use digital assets; and promote widespread trust and adoption of cryptocurrencies.
3) Modeling on the Strategic Petroleum Reserve
The U.S. Department of Energy's management of the Strategic Petroleum Reserve (SPR) demonstrates how government maintenance of a commodity reserve can impact markets and policy.
While the SPR is primarily aimed at energy companies and indirectly affects a broad range of consumers, which differs from the cryptocurrency industry, its management model can serve as a foundational model for constructing a cryptocurrency reserve.
The SPR is used to stabilize oil prices, balance budget deficits, and generate revenue, while providing influence in global markets. Similar to the SPR's impact on the energy market and inflation, a cryptocurrency reserve could have analogous effects on the digital asset market and monetary policy.
In day-to-day operations, the SPR is managed by the Department of Energy, but the president can issue directives to release reserves. Congress can also authorize the sale of oil from the SPR to fund government expenditures or address emergencies and legislative needs, such as periodic sales to influence reserve levels.
Therefore, the SPR has influenced financial and monetary policies, including stabilizing oil prices, commodity prices, and inflation expectations.
Similarly, cryptocurrency reserves can stabilize the cryptocurrency market, counter economic instability, and drive global adoption of cryptocurrencies. Just as Congress authorizes SPR sales to fund government projects, legislation can also stipulate the use of cryptocurrency reserves.
If a Bitcoin reserve is established, the Federal Reserve would play a role similar to the SPR, while the CFTC could manage the underlying assets like the Department of Energy, becoming a regulatory and governance body.
The Federal Reserve would strategically influence crypto-related policies, while managing and stabilizing the government's crypto asset funds. It could also ensure that surplus reserves are used to balance the budget and generate revenue, and protect the fundamental interests of consumers.
The Federal Reserve would also continue to set interest rates, lend, and fund government projects, using cryptocurrencies as collateral.
Lumis' bill indicates that the Treasury Department will play a role in managing and safeguarding the Bitcoin reserve, just as it currently collaborates with the Federal Reserve.
The proposal for a decentralized Treasury-managed vault system could provide secure storage for a national cryptocurrency reserve, addressing ownership and custody issues, while ensuring transparency and accountability, in line with the growing public acceptance of comprehensive trust in cryptocurrencies.
3. The Path to Balance: Efficiency, Innovation, and Development
The idea of establishing a national cryptocurrency reserve reflects a transformative vision for the American economy, combining traditional financial principles with emerging digital technologies.
However, the evolution of cryptocurrency policy marks a significant shift, as the initial decentralized vision of Bitcoin is moving towards a more regulated, government-integrated future.
1) Challenges and Balance
The current challenge is to balance the efficiency of consumer use, investment, and innovation in digital assets, while preserving their decentralized historical ideals. Although decentralization is core to the industry, its rapid growth has reached a point where a certain degree of regulation and limited government intervention is necessary to provide clear legal standards and consumer protection mechanisms. This need is particularly evident under the new government's "comprehensive trust in cryptocurrencies" policy.
To develop, rules of the game must be established, allowing everyone to compete within the same framework.
By embracing cryptocurrencies, the new administration has the potential to develop a future characterized by innovation, stability, and global leadership in the digital asset space. Whether through federal programs, state-level efforts, or regulatory reforms, the United States has the capacity to strategically and adaptively carve out this new frontier.
2) Ongoing Uncertainty and Global Competition
Congressional concerns over economic stability and inflation make securing approval challenging, while public skepticism and regulatory uncertainty may impede progress. The new administration's ability to strike the right regulatory balance between efficiency and innovation will determine the success of a national cryptocurrency reserve and the entire U.S. crypto industry.
Notably, as other countries develop cryptocurrency policies, the United States risks falling behind if it does not take proactive measures. Establishing a cryptocurrency reserve and implementing supportive regulations can solidify the U.S. leadership position in the global crypto economy, driving innovation and investment.
3) U.S. Standards and Global Leadership
The United States is known for its high standards in consumer protection, data security, and financial transaction rules, while also being a leader in capital markets.
Therefore, if other countries take the lead in this area, the United States may face the risk of unstable policies, and inadequate protection for digital assets. To cement its position as the global crypto capital, the United States should lead the industry's development with a "comprehensive trust in cryptocurrencies" approach.
Note: Stefanie Wayco is a partner at Duane Morris LLP, Matthew Catania is a senior attorney, and Gregory Bailey is an attorney.
The views expressed in this article are the author's own and do not represent the position of their employer, clients, or Portfolio Media Inc. and its affiliates. This article is for informational purposes only and should not be considered legal advice.
