Washington D. C. remains an ideal breeding ground for bad ideas. One of the most absurd and dangerous is the idea of exchanging U.S. gold reserves for bitcoin.
To be fair, we should first mention that we are encouraged by the growing acceptance by a handful of policymakers of alternative, non-governmental forms of currency.
U.S. Senator Cynthia Lummis of Wyoming began advocating the exchange of U.S. gold for bitcoin shortly after Donald Trump won the election last fall. It was music to the ears of several young cryptocurrency enthusiasts who, in their overflowing enthusiasm, have tried to position Bitcoin as a superior alternative to gold.
Bitcoin and gold may share some of the honest money zealots, but those are the only similarities . One is tangible and time-tested. The other is completely digital and relatively new. Both assets have their own strengths and weaknesses.
However, it's a little strange to see people touting Bitcoin as a replacement for gold, and it's a little suspicious.
Why so much effort to convince gold investors that Bitcoin is better and divide the honest money community? Shouldn't the focus instead be on attracting new people to the movement: the vast majority of those who own neither gold nor Bitcoin?
Bitcoin was designed as an alternative to fiat money, not gold. The creator of the project, known by the pseudonym Satoshi Nakamoto, sought a currency that was universal and outside the control of Wall Street banks, central banks and governments.
Instead of pushing for Satoshi's vision, people like Senator Lummis want the federal government to simply exchange gold for bitcoin. But it should consider whether making it a "reserve" asset in any way benefits the cryptocurrency or its constituents.
Let's start by taking a look at the history.
*Gold is the original reserve asset.
*The reason the US government has over 8,000 tons is that the dollar was redeemable for gold. Therefore, the Treasury needed a reserve. But that redeemability was breached.
*There is little reason to believe that any reserve asset, including BTC, will be used for public benefit.Virtually no one advocates that dollars should be redeemable for Bitcoin, which makes the argument for holding it as a reserve somewhat specious.
Proponents simply believe that the token will outperform gold as an investment. They want the Treasury to dump thousands of tons of gold and make a massive speculative bet on the cryptocurrency markets. Leaving aside the dangers of such speculation, we wonder what exactly people in favor of "Bitcoin reserves" expect to happen if Bitcoin turns out to be a successful investment for the Treasury. Will they simply feel better when the federal government has trillions of dollars worth of Bitcoin on its books, or do they expect officials to do something with it?
Perhaps they imagine that officials will do something positive, such as using the huge amount of Bitcoin to pay down the federal debt. If so, they probably won't be happy about the Treasury flooding the market with BTC to raise funds to do so.
Senator Lummis suggests that a Bitcoin reserve could spur "financial innovation" and promote "economic security." He doesn't provide details, so we're supposed to take it on faith. Politicians prefer fiat money and more government control. Theories that incorporate this story will be far more plausible than those expected by Bitcoin stock advocates.
We will offer one such theory, by way of example. Policymakers are already discussing the next evolution of fiat money: a Central Bank Digital Currency (CBDC). CBDC tokens can be created without limit, like fiat money, but allow transactions to be tracked and monitored.
Perhaps bitcoin (and perhaps gold reserves as well) will be used in a "basket" of assets to add legitimacy and appeal to CBDC officials' plans.
Suffice it to say that bitcoiners should learn a lesson that many gold fanatics learned long ago: it's probably not a good idea for governments to get involved in any monetary system.
Clint Siegner, Money Metals