Donald Trump has announced his intention to create a sovereign fund in cryptocurrencies and also create cryptocurrencies, exchange reserves in the Federal Reserve (the Central Bank of the United States). This idea has no economic sense, but it rewards an industry that has largely contributed to finance Trump’s election campaign. It could also introduce crime at the heart of the American budget.
For those who are not sure to understand cryptocurrencies, a small introduction can be useful. These are financial instruments created from scratch by private companies. There are hundreds, many of whom have a very low lifespan. These instruments have no material form, these are only lines in the accounts of these often knowingly unknown companies, such as the designer of Bitcoin who hides behind the pseudonym Satoshi Nakamoto, which has never been pierced.
Transactions are conducted in a decentralized and anonymous manner through drawn up computer programs. When they create cryptocurrency, companies receive money (dollars, euros, etc.). Then, the price of each cryptocurrency fluctuates according to demand and supply. But they are not currencies because they are almost not used to pay purchases.
In addition, an essential quality of real currency is the stability of its value. However, with the exception of stablecoins indexed to the dollar or euro and whose volume is not significant today, this is absolutely not the case, as shown in the figure below which reveals the fluctuations in the price of bitcoin since its creation in 2009.
Initially, the attraction of cryptocurrencies was the libertarian concept of escaping control of central banks and the supervision of the authorities. Friedrich Hayek, Nobel Prize in economics and cantor of the liberal economy, defended the idea of currencies issued privately. This approach is old and was put into practice before being theorized.
In the nineteenthe century, when paper currency – in opposition to metallic currency, gold and silver – began to develop, we have seen flourish so -called parallel currencies, generally issued locally by small banks which guaranteed the value of these banknotes. Almost all of these currencies collapsed when the bankers disappeared, taking with them the gold and the money thus collected and abandoning their customers to their sad fate.
Very popular in the United States against the backdrop of rarity of the dollar money, this experience led the federal state, in the 1860s, to take over the program of money (Legal Tender Act of 1862), with the creation of the “Greenback”, the “Green Tap”. Everywhere, the issue of money has thus become a monopoly granted to central banks.
The creation of Bitcoin in 2009 opened a new cycle. The craze that followed boosted the demand and its price began to climb, going from 10 dollar cents in 2009 to 1 dollar in 2011, 10 times more in two years. Spectacularly rapid profile stories took over, and reached $ 100 in 2013. At the beginning of last February, he exceeded $ 10,000, before losing 15% since.
This is pure speculation, the hope that the price increases, for no other reason than the increase in demand. As long as the craze is maintained, this is what is happening, but periodically the courses fell, for example in 2021-2022 when China prohibited the detention of Bitcoins and then when the interest rates began to be noted in the face of post-Cavid inflation.
The fall was spectacular: Bitcoin lost in one year two thirds of its value, ruining the least alert investors, who buy when prices go up and sell when they drop, thus discovering at their expense the risks of pure speculation. It seems that most of the users of cryptocurrencies are those which are attracted to anonymity, those whose activities are not recommendable, traffickers of all kinds and banned governments of the financial markets, such as North Korea or Iran. The United States government is about to join them.
Like naive investors, Trump is amazed by the expected gains and hopes to gain popularity when the cryptocurrency prices increase.
Faced with this volatility, the authorities strive to protect naive consumers and, in the face of criminal actors, they develop means to unravel their anonymity. The Biden administration was particularly active, to the chagrin of entrepreneurs who produce and manage cryptocurrencies, who make a fortune by selling a product that does not cost them much to make.
In the United States, they used their considerable means to support Donald Trump in exchange for good and loyal service after his election. The elevator referral consists not only in eliminating the regulations, hiring several managers of cryptocurrencies and closing various current surveys which aim for important companies (Coinbase, Gemini and Opensea), but also to encourage and stabilize the demand, thanks to the constitution of a sovereign fund.
Trump’s precise intentions are far from clear for the moment. Faced with his statements lacking in details, we are reduced to imagining what could happen. In principle, a sovereign fund is used to place money to finance public spending when the need is felt. Many oil and gas producing countries have created such funds to use them when their reserves have melted or when oil and gas are no longer exploited. Donald Trump never mentioned this reason. Like naive investors, it is amazed by the expected gains and hopes to gain popularity when the prices of cryptocurrencies increase.
Sovereign funds are generally invested in stable assets on the short and long term, for example American treasury bills. The problem is that the value of this fund will be subject to the considerable volatility of cryptocurrency prices. In addition, there is no guarantee that these funds will not disappear, for example when the craze is passed, or when the companies that have expressed cryptocurrencies will choose to disappear because they have accumulated enough profits.
Strengthening regulations and the possibility of unraveling anonymity makes this hypothesis probable. Obviously, deregulation, now underway in the United States and the creation of the American sovereign fund, are removing this possibility, this is precisely the reason why cryptocurrencies have bet on the election of Trump.
In some of his statements, Donald Trump also indicated his desire to order the Federal Reserve to acquire reservations in cryptocurrencies. Again, we guess his motivation. If it held significant quantities of cryptocurrencies, the federal reserve would naturally be brought to intervene to stabilize its courses, powerfully strengthening the attractiveness of the cryptocurrencies chosen by Trump. It is not surprising that cryptocurrencies’ prices flew last November after his electoral victory.
But where would Donald Trump take the money to acquire these cryptocurrencies? The American president mentions an objective of a hundred billion dollars. He explained that he was going to use the cryptocurrencies entered in judicial cases, but the amount would be about twenty billion. For the rest, the public treasury will have to borrow dollars which he will sell to buy cryptocurrencies. Borrowing with interest to invest in extremely volatile assets is a bizarre idea.
In addition, when Trump uses his cryptocurrencies to finance spending or lower taxes, public debt, already close to 100% of GDP, increases. Again, he could push the federal reserve to raise the lessons to get a good deal. This is called market manipulation and it is strictly prohibited, in principle.
The protection of essentially villainous investments by the most important financial center in the world projects a raw image, as incomprehensible as the reversal of traditional alliances of the United States. It is not impossible that this project is openly criticized, including within the republican party and by the financial elite, which are uncomfortable to see the round of the creators of Cryptomonnaies agitate around the president. As always with Donald Trump, the worst is not sure, but it is not excluded either.
