Written by: Jason Jiang, Hedy Bi
In the early hours of today, Federal Reserve Chairman Powell made it clear at a press conference following the monetary policy meeting that the Federal Reserve has no intention of participating in any government plan to accumulate Bitcoin. He emphasized that such matters fall within the responsibilities of Congress, and the Federal Reserve is not seeking to change existing laws to allow for the holding of Bitcoin. Powell's remarks immediately triggered market volatility, causing Bitcoin prices to rapidly retreat from their highs earlier in the week. According to information from the prediction market Polymarket, the probability of a Bitcoin Strategic Reserve decreased from a high of 40% on the 18th to 34% after Powell's speech. The overall market capitalization of the crypto market also plummeted, with a total market value evaporating by about 7.5%.
Image source: Polymarket
This statement not only left the market puzzled about the prospects of the 'Bitcoin Strategic Reserve (BSR)', but also refocused attention on a deeper question: Does the Federal Reserve really have the authority to block the BSR plan?
First, it is necessary to clarify the Federal Reserve's position within the U.S. financial system. The Federal Reserve's superior authority is the U.S. Congress: Congress is the highest authority for all financial regulatory agencies, enacting financial regulations and policies through legislation and authorizing other financial institutions (such as the SEC and the Federal Reserve) to exercise their functions. In the U.S. financial market, monetary policy and fiscal policy are the two core tools of government economic management, each overseen by the Federal Reserve and the Treasury, respectively. These agencies maintain independence through mutual checks and balances to ensure the smooth operation of the U.S. economy and finance.
The Federal Reserve enjoys a high degree of independence in monetary policy and national economic stability, but in the decision-making process for establishing the BSR, the Federal Reserve cannot 'veto' it.
If the Trump administration wants to quickly establish the BSR, the most straightforward way would be to sign an executive order after taking office, directing the U.S. Treasury to utilize the Exchange Stabilization Fund (ESF) to directly purchase Bitcoin. The ESF is a special fund managed by the U.S. Treasury, primarily used for foreign exchange market intervention, supporting dollar stability, and responding to international financial crises. It currently includes assets such as the dollar, Special Drawing Rights (SDR), and gold. The operation of this fund is not subject to the control of the U.S. Congress, and the president and Treasury have significant autonomy in its usage. The president theoretically can directly instruct the Treasury via an executive order to adjust the funding allocation of the ESF to purchase or reserve specific assets, thereby bypassing Congress’s direct appropriation approvals, reducing political resistance. The executive order recently drafted by the Bitcoin Policy Institute aims to establish the BSR in this manner.
Image source: Bitcoin Policy Institute
This method is the easiest to implement, as the use of ESF funds does not require prior approval from Congress, but Congress can investigate or legislate to restrict its operations. During the COVID-19 pandemic in 2020, Congress imposed strict limitations on some of the Treasury's fund operations. Additionally, the sustainability of the BSR established through executive orders is questionable, as executive orders are essentially an extension of executive power, and successors may annul or modify previous related decisions through new executive orders.
If one wishes to establish and maintain a long-term stable BSR, another path must be chosen, namely through Congressional legislation to include Bitcoin in the Strategic Reserve Act or similar laws, clearly establishing Bitcoin's status as a national strategic reserve asset. This method has stronger legality and can establish a long-term framework for Bitcoin reserves. The Bitcoin Strategic Reserve Act proposed by Republican Senator Cynthia Lummis previously chose this path. This bill has now been formally submitted to Congress and is under review by the Senate Banking Committee, after which it will still need to pass through the Senate, House of Representatives, and the president's review to complete the legislation. Therefore, establishing a strategic Bitcoin reserve through this path will take longer and may encounter various obstacles along the way.
Whether through presidential executive orders or Congressional legislation to establish a strategic Bitcoin reserve, from the proposals revealed so far, it ultimately needs to be implemented under the leadership of the Treasury, rather than the Federal Reserve.
Image source: Congress.gov
In addition to the aforementioned options, the Federal Reserve and the Treasury could theoretically choose a middle path for Bitcoin allocation. The Federal Reserve could purchase Bitcoin through open market operations and include it on its balance sheet. Due to its relative independence, the Federal Reserve's actions do not require Congressional approval, but a clear policy framework is needed to support its purchase of Bitcoin. Given the recent statements by the Federal Reserve, the likelihood of this option being realized in the short term seems low. The Treasury could establish a special fund to invest in Bitcoin as part of a fiscal investment plan, which, while not changing the existing legal framework, would require Congressional approval for related financing.
Regardless of the approach taken, the Federal Reserve's 'no' cannot outright deny the proposal for the BSR, and the Trump pragmatists have shown support through action. According to on-chain data, just two minutes into Powell's speech, Trump's family crypto project, World Liberty, quietly acted to start buying altcoins. This scene undoubtedly reveals a deeper level of game theory: on one hand, the Federal Reserve's lukewarm response to the Bitcoin Strategic Reserve plan reflects the government's cautious attitude towards emerging assets; on the other hand, the steps taken by Trump's family crypto project reveal the subtle tug-of-war between traditional power and market innovation. The delicate game between the government, traditional finance, and the crypto market may be the prelude to the future fate of the crypto market.
