The US Department of the Treasury, established in 1789, is responsible for managing the federal government's finances, collecting taxes, issuing currency, and overseeing public debt. The core responsibility of this agency is to ensure the nation's financial stability, provide funding for government activities, and promote economic growth.
The Treasury operates by issuing debt instruments such as bills, bonds, and government securities, which are considered one of the safest investments globally due to the full guarantee from the US government.
The idea of adding the top cryptocurrency Bitcoin to the national treasury was first explored in smaller economies around the world, such as El Salvador, which recognized Bitcoin as legal tender in 2021.
What are Treasury Assets?
Treasury assets are holdings that are part of the federal government's financial reserves. These assets typically include cash reserves, gold, and securities. The selection of Treasury assets is based on several important criteria. Here's how Bitcoin, in its current state, meets these criteria:
Liquidity
Liquidity is the ability to convert an asset into cash quickly without significant loss. The higher the liquidity, the healthier the asset is typically. Bitcoin is one of the most liquid digital assets globally, with annual trading volume reaching trillions of dollars. The Treasury could liquidate its holdings quickly, although large transactions may impact market prices.
Safety
Assets must have minimal risk of default or depreciation. Assets with high counterparty credit risk or exposure to volatile markets are generally unsuitable. Bitcoin is a decentralized and censorship-resistant asset, providing a hedge against political or economic instability. However, risks include cyber attacks and the need for secure custody solutions.
Stability
Treasury assets should not exhibit excessive price volatility. Bitcoin's volatility remains its biggest weakness. Its value can fluctuate significantly within a few hours, which is at odds with the Treasury's preference for stable assets like US government bonds or gold.
Yield
While safety is the top priority, generating modest returns helps sustain government operations. Unlike traditional Treasury assets, Bitcoin does not generate interest. However, Bitcoin's strong price appreciation over the past decade makes it a compelling capital gains candidate. For example, if Bitcoin's historical annual growth rate (~200%) continues, it could significantly outperform traditional assets.
Bitcoin in the US Treasury
Proponents of adding Bitcoin (BTC) to the US Treasury argue that Bitcoin, with its limited supply of 21 million coins and decentralized nature, could serve as an inflation hedge and a safeguard against currency debasement.
Companies like MicroStrategy and Tesla have drawn attention by adding Bitcoin to their corporate treasuries, demonstrating its potential as a reserve asset. This strategy is driven by the view that Bitcoin could outperform traditional fiat reserves and serve as an uncorrelated asset to hedge against economic instability.
Donald Trump's victory in the 2016 US presidential election and his nomination of Paul Atkins, a crypto-friendly figure, as the Securities and Exchange Commission (SEC) chairman played a crucial role in fueling the optimistic sentiment in the cryptocurrency market, driving Bitcoin's price to $100,000.
The Nashville Announcement of 2024
In Q3 2024, the Trump administration made a groundbreaking announcement in Nashville, revealing plans to allocate a portion of the US Treasury's reserves to Bitcoin. This move aimed to diversify the nation's asset base and capitalize on the potential benefits of digital assets. The specific details included:
- Allocating 2% of the Treasury's reserves to Bitcoin.
- Implementing a phased purchase over 24 months to minimize market impacts.
- Custody to be managed by private sector partners, coordinated with government-supervised institutions.
This announcement sparked intense debates in political and economic circles, with opponents questioning the rationale and potential risks, while supporters hailed it as a bold step towards the future of finance.
The Bitcoin Bill to Establish a Strategic Bitcoin Reserve Fund
Senator Cynthia Lummis introduced the Bitcoin Bill of 2024, proposing that the US Treasury establish a national Bitcoin reserve fund by purchasing 1 million BTC over 5 years, with a plan to acquire 200,000 BTC annually. This initiative aims to position Bitcoin as a strategic asset to hedge against inflation, reduce national debt, and strengthen America's global financial leadership.
The key highlights include:
Investment Plan
- The Treasury Department plans to invest about $76 billion in Bitcoin, gradually purchasing over 5 years to minimize price shocks.
Secure Storage
- Bitcoin will be stored in digital vaults managed by the Treasury Department for at least 20 years.
- The custody measures and partners involved have not been disclosed but will focus on the highest security standards.
- Combining physical and digital infrastructure with the highest level of security to store Bitcoin.
Disposal Guidelines
- Propose strict regulations on disposal, only allowing sales in specific cases. For example, digital assets from forks or airdrops in the strategic Bitcoin reserve fund cannot be sold or processed within 5 years unless legally permitted.
- These restrictions aim to stabilize market impact and maintain the value of Bitcoin as a precaution against economic downturn.
Transparency and Oversight
- The law requires transparent reporting and a secure custody framework.
- A blockchain-based monitoring system and independent audits will be implemented.
- Quarterly reporting on transactions and Bitcoin reserve fund balances is mandatory.
The bill has garnered attention due to the political alignment in Congress and support from industry leaders. It aims to position the US as a global leader in cryptocurrencies, while also sparking debates on the economic risks and volatility associated with digital currencies.
Impact on the US Treasury's Risk Profile
- Price Volatility Risk: Bitcoin's price volatility is significantly higher than traditional Treasury assets. The Treasury will need robust risk management strategies to cope with potential price fluctuations.
- Liquidity Considerations: While Bitcoin has much higher liquidity than many assets, the Treasury's large-scale transactions could disrupt market prices. In the long run, Bitcoin has shown sensitivity to supply and demand shocks, affected by its position in the market cycle.
- Inflation Hedge: Bitcoin's limited supply makes it an attractive inflation hedge, while also diversifying the Treasury's reserve strategy.
Impact on US Public Debt
Credit rating agencies may reassess the Treasury's risk profile. Holding Bitcoin may be viewed as speculative, potentially impacting the US's AAA credit rating. Bitcoin does not meet the liquidity, safety, and stability criteria like gold.
Any downgrade in credit rating could lead to higher interest rates on Treasury bonds, increasing the cost of servicing public debt. However, if Bitcoin performs well, it could bolster the Treasury's financial position, offsetting this risk.
US debt instruments, traditionally seen as safe-haven assets, may face scrutiny from cautious investors. Conversely, institutional Bitcoin supporters may increase demand. Another argument to mitigate oversight is that only 2% of the Treasury's total assets are expected to be invested in Bitcoin, as reported from Nashville.
Impact on Bitcoin Prices
A large-scale purchase by the US Treasury could trigger a significant Bitcoin price rally, reinforcing its position as a macro asset. Even before the Treasury begins large-scale Bitcoin purchases, the announcement that the Federal Reserve is considering Bitcoin as a reserve currency could create a supply shock, leading to a strong price increase.
The approval of Bitcoin ETFs in the US has provided the necessary legitimacy and credibility for this asset and asset class. The Treasury's move to hold Bitcoin as a reserve asset could drive global institutional adoption, further legitimizing Bitcoin in the financial markets.
As the US Treasury becomes a significant holder, and major countries and corporations buy Bitcoin, the leading cryptocurrency may experience reduced volatility over time, similar to gold in previous decades.
US Public Debt and Bitcoin Reserves
The US government's national public debt, exceeding $33 trillion by 2024, is a pressing economic issue. The idea of using Bitcoin reserves to alleviate the public debt burden opens up intriguing possibilities. If Bitcoin prices rise significantly, the Treasury could sell a portion of its holdings to reduce debt.
Assuming the US holds $50 billion in Bitcoin reserves with an average purchase price of $30,000 per coin. If the Bitcoin price rises to $150,000 per coin, the reserve value would reach $250 billion, generating a $200 billion profit.
While this figure may only reduce a small portion of the total public debt, it could make a significant contribution to specific financial programs or interest payments. Bitcoin reserves could serve as a financial and geopolitical tool, reducing reliance on fiat currency reserves and diversifying from traditional assets vulnerable to inflationary pressures. Additionally, Bitcoin could help balance deficits in inflationary scenarios that erode the value of the US dollar.
In the short term, Bitcoin is unlikely to become a primary tool for managing national debt. Its role will be supplementary, providing diversification and inflation-hedging capabilities. However, if Bitcoin matures into a widely accepted global reserve asset, similar to gold, it could play a more significant role in fiscal strategies.
Currently, Bitcoin's real contribution lies in modernizing the Treasury's asset management approach, demonstrating openness to innovation while still focusing on long-term fiscal sustainability.
