Since Donald Trump announced his support for cryptocurrencies, bitcoin fans have been rubbing their hands. And his most “cryptobro” allies, who have surrounded the president in recent months in important positions, want to take advantage of the re-elected president’s interest to promote an idea that could strengthen the credibility of cryptocurrency and its price: creating a “strategic Bitcoin reserve” funded by Federal Reserve gold, which would virtually mean officially switching from gold to bitcoin as a major reserve asset.
The project announced by Senator Cynthia Lummis, called “Bitcoin law”, would use the Fed to finance bitcoin purchases. And more precisely, one of the central bank’s best-kept secrets: its “invisible” gold reserve, hidden at the bottom of its balance sheets since 1973.
The Fed’s “treasure”: 677 billion which officially “does not exist”
Gold is hovering around its all-time highs this year and is trading this Tuesday at $2,631 per ounce. But there is one entity for whom gold is only worth $42.22 an ounce: the Fed. Accounts published weekly by the US central bank indicate that it has $11.041 million in “gold reserves”a figure that has barely changed in decades. But you just have to scratch a little to discover a very different reality hidden behind: The 261.5 million ounces hidden in this figure would be worth $688.035 million on the market. at today’s prices.
Why this disconnect between the value of gold recognized by the Fed and its real price? The fault lies with two presidents who entered history in capital letters, for very different reasons: Franklin Roosevelt and Richard Nixon. The first promulgated in 1934, in the midst of the Great Depression, a law which It prohibited banks and citizens from buying or selling gold and required all institutions to turn over their reserves to the Treasury.. The goal was to weaken the “gold standard” and allow the government to devalue the dollar without running the risk of people exchanging their dollar bills for gold. Thus, the government and the Fed were able to increase the amount of money in circulation, escaping the deflation caused by the gold standard, which had worsened the depression.
In exchange, the Fed received “gold certificates,” documents recognizing ownership of the gold now deposited in the Treasury’s vaults. These certificates are the only ones he has owned since then, with the exception of a small quantity of gold held at the New York Fed.
The second chapter arrived in 1973, when the government of Richard Nixon decides to end the second major gold standard system at the global level which existed since the Second World War, the so-called Bretton Woods system. On February 12, 1973, Nixon’s Treasury Secretary, George P. Shultz, announced a devaluation of the dollar: from $38 to $42.22 per ounce. The historical key is that he announced in passing the end of the restrictions imposed by Roosevelt: American citizens could buy and sell gold freely and banks and companies could trade and invest internationally without government authorization . Subsequently, all the major countries of the capitalist world announced similar measures, to varying degrees. Capital controls were gone, the gold standard was dead, and financial globalization was officially born.
For the Fed, however, the story ended on September 21, 1973, when this devaluation took effect. On that day, the central bank’s gold reserves stood at $11.591 million at $42.22 per ounce. Since then, 49 years have passed and these reserves amount to 11.041 million dollars… these same 42.22 dollars. Because? Because In these 49 years, Congress has never repealed or amended this 1973 law and, as a result, the Fed remains obligated to value its gold reserves at this price.
This law would finally repeal the 1973 price and allow the Fed to mark its gold to market. And its reserves would suddenly increase from 11.041 million to 688.035 million dollars, at current prices. And Lummis thinks that the Fed could keep this 11.041 million which it has recorded on its balance sheet for almost five decades, and return the difference -677 billion- to the Treasury to buy bitcoins.
If there was a shortage of money, I would also use the Fed’s profits: the first $6 billion in annual profits would be devoted entirely to buying bitcoins. And if that wasn’t enough, it would reduce the Fed’s reserves. So far, the banks that make up the system can have reserves of up to 6.8 billion, with the rest going to the Treasury. This law would reduce this limit to 2.4 billion and force the difference to be remitted to the Treasury to, again, buy bitcoins.
More bitcoins than Nakamoto
The bill provides that this reserve be maintained for 20 years and be added to the 208,000 bitcoins currently held by the Treasuryfrom various seizures from criminal and terrorist groups. If the law were passed, this million would place the United States as the largest holder of bitcoins in the world, ahead of Satoshi Nakamoto, its creator, who owns 968,000.
To buy, all bitcoin funds and ETFs added together give a total of 1.09 million bitcoins: the iShares Trust has 492,000, Grayscale has 218,000, and Fidelity has 195,000.
As for companies, Microstrategy accumulates 386,700 bitcoins, Block.one 164,000, Tether 82,454 and Marathon Digital 33,875. Other listed companies like Tesla or Coinbase accumulate barely around 9,500. And in terms of countries , the United States is followed by China, with 190,000, the United Kingdom (61 245) and Ukraine (46,351).
It wouldn’t be El Salvador
One possible comparison would be with El Salvador, a country which has declared bitcoin as legal tender and which accumulates bitcoins in its Treasury, although much fewer: only 5,946. But this law would not make bitcoin the official currency, a privilege that the dollar retains, nor would it try to convince citizens to use it in their daily lives, as El Salvador did.
Moreover, one of its objectives would be the opposite. El Salvador wanted to issue bitcoin debt. However, this law wants to do the opposite: possibly sell these reserves to pay the American public debt. As Lummis points out, if the price of bitcoin were multiplied by 100 over these 20 years, its value would amount to 10,000 billion dollars. Less than a third of the $36 trillion in US debt today, and that number would likely increase significantly in 20 years, but a not insignificant amount after all.
Of course, in the face of such purchases, one would expect a sharp rise in the price of bitcoin. In total, only 21 million bitcoins can be issued. Adding the bitcoins that Nakamoto keeps (and has never touched) and those that have been lost, experts estimate that around 4.6 million are “out of circulation”, to which must be added 1.25 million which are still not issued. And of the remaining 15.3 million, another million is already in the hands of ETFs. SO, The United States would buy more than 7% of all bitcoins actually in circulation.. And, since the market is not very liquid, the effect on price can be enormous.
A similar effect but in the opposite direction would occur with gold. If the gold futures market trades around 18 million ounces each day (based on the average of the last 65 days), production of 261.5 million ounces, although it was spread over several weekswould amount to flooding the market with gold and, therefore, would give a bearish blow on its value.
Would it be possible to adopt this law?
The million dollar question is whether this law can be approved, or whether it will end up putting the dream of the righteous in a drawer, like so many other projects. And the biggest hope is that Trump has surrounded himself with a group of Bitcoin fans, who even encouraged him to launch his own cryptocurrency, World Liberty Financial. At their head is Elon Musk, and in the Senate there are already at least three Republicans: Lummis, Bernie Moreno and Tim Sheehy, the last two elected this month. “The cavalry is coming to Washington,” Lummis celebrated. and the march of Gary Genslera declared enemy of cryptocurrencies which announced his resignation as chairman of the Securities and Exchange Commissionopens the door to a hitherto unforeseen revolution.
There are, however, obvious doubts about whether Congress fully understands the consequences of this leap into the void. “This continues to put government money on the line, and bitcoin has not proven to be a particularly stable asset,” says Jennifer Schulp, director of financial regulatory studies at the Cato Institute’s Center for Monetary and Financial Alternatives . “The bill asks senators and congressmen, who may not understand cryptocurrencies very well, to take a much bigger leap of faith in terms of long-term viability.”
But Lummis believes it is time to provide “support” for bitcoin as the “most viable” cryptocurrency. “It’s the benchmark for digital assets, and it would be the way to integrate them” into the global financial system, he says.
But your problem remains legislative. On the one hand, they would have to overcome the veto power of the Democratic minority in the Senate: they would have to convince 7 Democratic senators, and, for the moment, only one, Democrat Kirsten Gillibrand, is working with Lummis on Bitcoin laws . . To this must be added the small Republican majority in the House of Representatives, made up of two to four representatives (one seat in California is still “dancing”), which makes it very difficult to pass laws of any kind. And Trump is not known for his delicacy or skill when it comes to negotiating laws with the opposition, exactly.
One possibility would be use the so-called “reconciliation” mechanismwhich allows spending and revenue laws to be approved by a simple majority. The key here would no longer be to convince Democratic senators, but to ensure that each Republican representative votes for it, something much more complicated than it seems. But everything would end up in the hands of the parliamentary advisor to the US Congress, who would decide whether or not this law meets the conditions to be approved by a simple majority.
