Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. Opinions are his own.
The crypto industry is full of buzz at reports that Donald Trump might consider the use of the exchange stabilisation fund, or ESF, to create a strategic Bitcoin reserve.
They are right to be excited, but for the wrong reasons.
The focus in the markets is purely on the short-term price effects. I am not denying that the effect could be big, but it is the long-term impact that would be even more interesting — or disturbing if it goes wrong.
Trump did not really say he would do this.
It was an answer to a leading question in the interview he gave to CNBC at the New York Stock Exchange.
The ESF is an emergency fund created in 1934 used for currency intervention. In most countries it is the central bank that intervenes in currency markets. The ESF, which was part of the 1934 Gold Reserve Act, was a child born in the immediate aftermath of the collapse of the gold standard.
Congress was concerned that this would lead to potentially inflationary currency instability, so they created the ESF as an intervention instrument that would leave the domestic money supply unchanged.
US administrations used the ESF on many occasions to stabilise the dollar. During the global financial crisis, the Bush Administration used it to backstop the money market funds. I think of it as the ultimate capitalist slush fund.
At the end of last year, the ESF had total assets of $213 billion. If it bought Bitcoin, the idea would not be to stabilise the dollar value of Bitcoin.
But it would, sort of, create a strategic Bitcoin reserve.
Conflicting goals
The Trump Administration has some conflicting goals here. Trump loves Bitcoin, but he also hates trade deficits and an overvalued dollar.
My reading of his economic policy priorities is that the latter is the priority, and my fear is that it might come into conflict with the former.
There is talk about a new Plaza Accord, named after the 1985 agreement at the New York Plaza where the US, Japan, Germany, the UK, and France agreed on a strategy to weaken the dollar.
These days, finance ministers are more likely to meet in Mar-a-Lago, Trump’s Florida residence, or in Trump Tower, which is only a couple of blocks away from the Plaza hotel, but the idea would be the same.
Trump may need the entire firepower of the EFS, and then some, to drive down the dollar’s nominal effective exchange rate.
Tariffs, if implemented intelligently, could help. But they could also have the opposite effect.
The problem of global imbalance and the persistent US trade deficit arose in the fiat currency economy. It has nothing to do with crypto. So the question is whether in his financial policies, Trump can manage to walk and chew gum — and juggle a few other things at the same time.
The idea of a Mar-a-Lago accord and a strategic Bitcoin reserve could easily come into conflict.
‘A very clever idea’
The reason everybody is discussing the ESF is that this is a large fund run under the direct control of the US administration.
If you formally classify Bitcoin as a semi-official currency, you could use the fund to buy Bitcoin, without the need for approval from Congress. This is a very clever idea.
Inclusion in the ESF would give Bitcoin semi-official recognition of a currency in its own right. Gold is also not a real currency, but it constitutes the lion’s share of official reserves of many central banks in the west.
Of the three classic economic definitions of money — means of transaction, store of value, unit of account — gold has maintained the notion of a store of value. Bitcoin answers to the first: a means of transaction.
Whether Bitcoin is a store of value is a matter of debate. I think, right now, its price is too volatile to meet that characteristic, but it has the potential to act as a hedge against inflation in the long-run.
Bitcoin would not all of a sudden become a central bank reserve asset like gold, but the inclusion in the ESF would be a big deal.
Economic theory makes a sharp distinction between money and capital, but modern financial markets are distinctly non-binary. We are not going to wake one day to discover that Bitcoin is our money. But it progressively takes on some of the characteristics of money.
‘Grave-digger’
The transition to a crypto-friendly regulatory regime in the US will also help.
The nomination of Paul Atkins, a crypto-friendly securities lawyer, as the next chairman of the Securities and Exchange Commission, is a sign of the times.
Trump is the first pro-crypto western leader.
It is not only the raw capitalism of crypto and crypto’s disruptive force that attract him.
He also, mistakenly in my view, believes that crypto would help the US strengthen its global role, and especially its competitive position against China. During the interview he said he wants the US to be the country of crypto, not China.
When talking about Trump, we must always remember that he is a transactional, zero-sum kind of a guy. He sees crypto as an investment opportunity, and he wants these investments to happen in the US.
But if Bitcoin were really to succeed, it might pose a clear and present danger to the US dollar especially.
The State Department and the US Treasury can sanction any global dollar transaction, even outside the US, because all dollar flows have to clear through US markets. But nobody can sanction a blockchain.
The only parts of the crypto-verse subject to regulatory controls are exchanges and derivatives products — not Bitcoin itself.
Trump may end up, inadvertently, as the grave-digger of the dollar-based global financial system.
This is one of those rare examples of a big real-time economic experiment. Best watched from a safe distance.
