Why I Am A No On A Strategic CryptoCurrency Reserve And You Should Be Too

Not Every Idea is Good

Trump sometimes throws ideas into the wind to see what happens. He is interested in other people’s opinions. They are trial balloons that help him think about it. Maybe he learns something he didn’t know before.

I have two investments in the cryptospace operating, Bitnomial and MLTech. I had a company, Open Finance that exited to an Israeli company. We were investors and I was on the board when OpenFinance engaged in an ICO. Originally they were CF Innovations and tried to tokenize a part of the real estate market. Another of our companies issued a cryptotoken to assist in its worldwide payments network. Pipit.global was acquired by a Swiss-based company (Qenta). I have looked at hundreds of cryptodeals since 2009. I am generally supportive of cryptocurrency innovation and look forward to the promises and potential of cryptocurrency being fulfilled.

I voted for Trump. I support a lot of what Trump is engaging in. But, I don’t support this at all.

He’s wrong about this one. I have written about it before here and here.

This idea is fluff and it is a tip of the hat to the Crypto Bros that supported Trump.

Cryptocurrencies are not well understood by the general public. Here is a very oversimplified and general distillation: Cryptocurrencies are made up of three things: a medium of exchange, a piece of software, and a commodity. They are attached to blockchains, which can be, but don’t have to be, depending on the design, a transparent ledger of all transactions in that cryptocurrency. Cryptocurrency is a radically libertarian project and the last time I checked Libertarians never looked to the government for a stamp of approval.

Crypto is NOT a store of value. The market determines its value. What if the market determines that the value of any particular cryptocurrency is zero?  In 2021, where was Bitcoin trading compared to where it was in 2019?

Cryptocurrency can be volatile. Trading can be thin. The only reason it exists today is speculation. There is nothing of value that has been built that businesses or individuals use every single day. Maybe someday, but not today.

There are plenty of reasons that the US government should not spend taxpayer dollars (remember, governments never “invest”; they only spend) on cryptocurrency.

If you are a free market person, you should be, at a minimum, very suspicious of any regulation or government action when it pertains to interfering in a market. Trump has just endorsed Bitcoin, Solana, Ethereum, and Cardano. This is the government picking winners and losers in a marketplace.

What if someone was working on another crypto that was better than any of them? Could the market give them traction or would they be ignored because they weren’t included in the governmental cryptocurrency reserve? Odds are good that if the Strategic Cryptocurrency Reserve goes forward as planned, the initial ones will be the ones the market flocks around. That’s government picking winners and losers, not a market.

What if the market decides the useful life of one of the cryptos that Trump named is over? It will be hard to abandon it if it is in the crypto reserve. The beauty of software is that if better software is written, old software is set aside and new software is installed.

A primary reason cryptocurrency was invented was to provide competition for fiat currency. The competition and tension between cryptocurrency and government fiat currency are metaphorically like school choice vs. government-run unionized public schooling. Professor John McGinnis has written eloquently about this: here, here, here, here, here, and here. 

McGinnis writes,

Modern law makes currency a creature of the state and ultimately the value of its currency depends on the public’s trust in that state. While some nations are more capable than others at instilling public trust in the stability of their monetary institutions, it is nonetheless impossible for any legal system to make the pre-commitments necessary to completely isolate the governance of its money supply from political pressure. This proposition is true not only today, where nearly all government institutions manage their money supply in the form of central banking, but also true of past private banking regimes circulating their notes under the shadow of public law. However, bitcoin represents a potential third currency regime far more resistant to state control because it mints currency units that exist in no physical place, places a numerical ceiling on the number of units that can be created, and relies on scientific principles from cryptography to guarantee that ceiling and verify any person-to-person transfer. The trust required is not in any government but in the decentralized order of those who verify bitcoin transactions and those who create the software these verifiers choose to run on their connected computers.

Government regulation can be a strategy companies engage in called regulatory capture. It is done all the time to freeze out competition, eliminate incentives to innovate, and erect barriers to competition. The cryptocurrency reserve idea is not regulatory capture on its face, but might de facto become that.

If the government holds cryptocurrency, it will not defray the costs of the national debt. This is true even if it held Bitcoin and Bitcoin went to a million per token or more. When the government moved to sell it, what would happen to the bids in the market?

The only thing that can decrease the national debt is to cut government spending, increase gross domestic product, and rejigger the tax code to eliminate penalties on success.

I wrote this before but will include it in my argument here. The United States is a capitalistic decentralized government. Enshrined in our founding documents are individual liberty and private property rights. Doing that enables innovation and free enterprise.

Both the SWF and the SBR oppose those core principles. They involve taxpayer dollars being aggregated, with a single decision-maker making the decisions. The money that would flow into either of those entities ought to be used to either pay down existing federal debt or cut government taxes and fees.

On the Capitalisnt podcast, Nobel Prize Winner Eugene Fama and a father of modern finance said Bitcoin should go back to zero. He might be right and he might be wrong, but there is no good reason that the US government ought to be participating in the cryptocurrency market.

The US should participate in the fiat currency market because it is the one that created the commodity for that market.

What is the value of any cryptocurrency? How do you measure it? Today, it’s done by comparing it to fiat currency. People say that XRP has value and that cross-border trading is done with it. Maybe. But, what is XRPs value? It’s whatever the US dollar’s value is.

In order to monetize XRP or any other crypto, I have to engage in a transaction to convert that crypto into fiat currency. There is little volume trading crypto pairs. The market is thin, and undeveloped. Having a crypto reserve in the federal or a state government will not help develop that market. The reason the FOREX market is the largest in the world is due to all the trading that is executed between countries.

Can crypto make that international trade more efficient? Maybe. But, we don’t know what it will even look like if it does. Maybe it won’t be any particular crypto but it will be a stablecoin issued by a private issuer that replicates the fiat currency. As I have written in the past, having the government issue digital currency is a terrible idea too.

The idea that cryptocurrency has a fixed supply is incorrect. XRP has no fixed supply. Bitcoin in its paper says there is a ceiling on the supply of individual coins. But, you can use decimals to split them up and so the supply is actually infinity. Using cryptocurrency isn’t going to fight inflation. Interestingly, if they did have a fixed supply it is likely that they would encourage psychological deflation. If you owned one, you wouldn’t want to spend or sell it. Deflation is far worse than inflation.

One promise of crypto is that it sets up a “trustless network”. So far that hasn’t been the case. Sure, there is a lot of fraud in fiat currency. It’s hard to catch and frankly entering in two-factor authorization all the time is a royal pain in the ass. It’s even hard to wire money out of my own bank account. But, crypto has had plenty of fraud too. The case that it will eliminate fraud hasn’t been shown in practice.

Blockchain is super cool, but blockchains have proven to be very slow to clear transactions compared to other systems. They are expensive to scale. One of the downsides to Ethereum was the cost of “gas” to move things along the chain. That’s why Solana and Cardano were created. There has been acrimony about forking blockchains. I have also heard a lot of people say, “I think there is value in blockchain but not in crypto.” Well, you can’t have a decentralized public blockchain without a cryptotoken that represents it. If you simply have a blockchain, you have a walled garden. In commodity trading we call them “clearinghouses”. In payments, Visa, Mastercard, and American Express have their own walled gardens. In banking, we have the SWIFT system. Finance is already chock full of blockchains but the idea behind crypto was to decentralize them and take away the ability for gatekeepers to cause friction and charge outsize rents for operating them. That’s why a real decentralized crypto has a token attached to it.

There is a reason to have a Strategic Oil Reserve. We might need it in case of war or some terrible natural disaster. In China, they have a Strategic Pork Reserve so they can feed people and the communist government doesn’t get overthrown. There is no need to have a Strategic Cryptocurrency Reserve. Our society can survive without cryptocurrency.

There are good reasons to regulate crypto lightly and encourage innovation. There is plenty of promise in crypto. But, having a Strategic Cryptocurrency Reserve is a terrible idea and will be a waste of taxpayer dollars which could be used to spend on something else, or pay down debt.

We are trillions and trillions in debt. Maybe we concentrate on reducing that.