By Gertrude Chavez-Dreyfuss and Lisa Pauline Mattackal
WASHINGTON (Reuters) - Bitcoin hit a record high above $107,000 on Monday after President-elect Donald Trump reiterated plans to create a U.S. bitcoin strategic reserve, stoking the enthusiasm of crypto bulls. Here's how the plan could work.
WHAT IS A STRATEGIC RESERVE?
A strategic reserve is a stock of a critical resource which can be released at times of crisis or supply disruptions. The best-known example is the U.S. Strategic Petroleum Reserve, the world's largest supply of emergency crude oil, which was created by an act of Congress in 1975 after a 1973-74 Arab oil embargo throttled the U.S. economy. Presidents have tapped the stockpile to calm oil markets during war or when hurricanes hit oil infrastructure along the U.S. Gulf of Mexico.
Canada has the world's only strategic reserve of maple syrup, while China has strategic reserves of metals, grains and even pork products.
HOW WOULD A U.S. STRATEGIC BITCOIN RESERVE WORK?
Analysts and legal experts are divided on whether Trump could use his executive powers to create the reserve, or whether an act of Congress would be necessary. Some have argued Trump could create the reserve via an executive order directing the U.S. Treasury's Exchange Stabilization Fund, which can be used to purchase or sell foreign currencies, and to also hold bitcoin.
The reserve could include bitcoin that the government has seized from criminal actors. That stands at around 200,000 tokens, worth about $21 billion at the current price, according to bitcointreasuries.net. Trump suggested in a July speech unveiling his bitcoin reserve plan that this stockpile could be the starting point, although it remains unclear what the legal process would be for moving them out of the Justice Department.
Trump has not said if the government would add to that stockpile by buying more bitcoin in the open market. To do that, the government may have to issue debt, although some proponents of a bitcoin reserve say the United States could sell some of its gold reserves and use the proceeds to buy bitcoin.
Currently, the most concrete bitcoin reserve proposal circulating in Washington comes from pro-crypto Republican Senator Cynthia Lummis, who personally holds five bitcoins, she told CNBC last month. In July, she introduced a bill, yet to gain traction, that would create a reserve operated by the Treasury.
The bill envisages that the Treasury would create a program to buy 200,000 bitcoins annually for five years until the stockpile hit one million tokens. This would represent about 5% of the total global supply of bitcoin of around 21 million. The Treasury would fund the purchases with profits on Federal Reserve banks' deposits and gold holdings.
The bitcoin reserve would subsequently be maintained for a minimum of 20 years.
WHAT ARE THE BENEFITS OF A BITCOIN RESERVE?
In his July speech, Trump suggested a bitcoin reserve would help the U.S. dominate the global bitcoin market in the face of growing competition from China.
Other proponents argue that by holding a stockpile of bitcoin, which they say is likely to continue appreciating over the long term, the U.S. could reduce its deficit without raising taxes, strengthening the U.S. dollar.
In November, Lummis told Fox Business that her plan would allow the United States to cut its debt in half in 20 years. "What that does is help us protect ourselves against inflation and protect the U.S. dollar on the world stage," she said.
A strong dollar would in turn give the United States more leverage over foreign adversaries like China and Russia, proponents say.
WHAT ARE THE RISKS?
Crypto skeptics say that, unlike most other commodities, bitcoin has no intrinsic use and is not crucial to the functioning of the U.S. economy.
Created in 2008, bitcoin remains too young and volatile to presume its value will continue to rise in the long term, while crypto wallets remain notoriously vulnerable to cyber attacks, they also argue. And given its volatility, any government purchases or sales could have an outsized impact on bitcoin's price.