Can Bitcoin Build on the ‘Trump Bump’?

‘The United States will be the crypto capital of the planet and the Bitcoin superpower of the world’ ¹

Donald Trump

A Half-Trillion Dollar Bet on Change

One thing you cannot accuse Donald Trump of is a lack of hyperbole. Yet even recalibrating for Trump’s colourful and often erratic track record on cryptos, markets are now pricing in a much friendlier environment for the industry under his next presidency. Bitcoin itself has risen c. 40% since the presidential election to a new all-time high – a half trillion dollar bet on change.

But is the hype warranted? We explore some of the issues and opportunities that lie ahead for the crypto industry under Trump 2.0 over the coming years.

Bitcoin as a US Reserve Asset?

Arguably the most anticipated development for Bitcoin under Trump 2.0 is the prospect of it becoming a reserve asset for the US Treasury alongside established staples such as gold and foreign currency. Concrete proposals have already been made under the BITCOIN Act ^{2 3} proposed to the Senate last July and this seems to be supported by the incoming Trump administration. This legislation envisions that US authorities will implement the purchase of one million Bitcoins over a five-year period, accounting for c. 5% of the current Bitcoin stock.  

Superficially, this might address a problem. Almost uniquely, US Treasury reserves are under-diversified, largely because the US dollar is itself the world’s preeminent reserve currency. As of the end of October 2024, over 75% of US reserve assets by value was in gold ⁴, rising to well over 80% if the dollar component of the IMF’s Special Drawing Rights (SDRs) is excluded ⁵. 

Notwithstanding this, it is unclear that Bitcoin could currently diversify US reserves successfully. The Bitcoin market remains relatively illiquid, tightly held, exhibits very high volatility and its performance during periods of market stress is uncertain. A recent report by the World Bank lays out these deficiencies in some detail ⁶.

While such criticisms are arguably reflective of the relative immaturity of the Bitcoin market, this also implies that a prerequisite for Bitcoin (and similar cryptocurrencies) is to become a more mainstream financial product. This is unlikely to happen quickly in the absence of proactive state sponsorship. Fortunately, however, this might now be on the horizon.

Pro-Growth Policies Beckon

Regulatory approaches to cryptocurrency operations varies greatly within the international community ranging from an outright ban (China), through various degrees of regulation (EU. UK, India) to a relatively liberal regime (Japan). This lack of consistency is itself an impediment to more widespread adoption.

In the US, an initially cautious stance has become more obstructive under the previous Biden administration. Oversight of crypto/blockchain enterprises have largely been delegated to both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) with the latter under the chairmanship of Gary Gensler being particularly hostile ⁷.

Rather than proactively legislating to accommodate this rapidly evolving sector, the SEC has thus far adopted a ‘regulation through enforcement’ strategy, liberally applying existing federal securities laws, often on an ex-post basis.  The result has been a high degree of regulatory uncertainty, a frustration of responsible innovation and a lack of integration into the legacy financial system.

Much of this will certainly change under the incoming administration, with Trump vowing to ‘end the anti-crypto crusade’, ensure more progressive leadership of both the CFTC and SEC and establish a digital asset advisory council. Entrepreneurs Elon Musk and Vivek Ramaswamy – designated to co-head a new Department of Government Efficiency (DOGE) – may have significant roles to play, given the scope for efficiency gains through innovative financial infrastructure.

However, it is the Trump’s nomination of Scott Bessent to the post of Treasury Secretary that is likely to be the most consequential. As a hedge fund manager, Bessent has been an ardent supporter for blockchain and digital assets and has previously invested in decentralised finance (DeFi) projects and blockchain startups. In the opinion of Ripple CEO Brad Garlinghouse, Bessent is ‘the most pro-innovation, pro-crypto Treasury Secretary we’ve ever seen’.

Towards A New Crypto Ecosystem

So, the prospects for the development and integration of the digital assets within the US financial system seem bright. What then might we expect to see over the next few years?

An early test will be an end to the ‘regulation through enforcement’ approach and the possible creation of ‘safe harbor’ provisions as interim measures. Bespoke crypto and blockchain regulation, developed in consultation with industry participants might then follow. Optimally, policy should be principles and disclosure based, with enforcement resources focused on high-risk areas such as misconduct, fraud, illicit financing and national security. Achieving a balance between oversight and flexible innovation will be crucial.

With such foundations established, digital assets will be in a strong position to move forward into legacy financial markets such as custody, securitisation (tokenisation), flexible finance and secure processing. Markets have already made a downpayment on such growth, but we just might see those Treasury Bitcoin reserves yet.

Citations

1. Excerpt from speech to the bitcoin2024 Conference, 27 July 2024, Nashville Tennessee. ↩︎
2. Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide (BITCOIN) Act. ↩︎
3. https://www.lummis.senate.gov/press-releases/lummis-introduces-strategic-bitcoin-reserve-legislation/ ↩︎
4. https://www.federalreserve.gov/data/intlsumm/current.htm ↩︎
5. https://www.imf.org/external/np/fin/data/rms_sdrv.aspx ↩︎
6. https://documents1.worldbank.org/curated/en/099553102232444409/pdf/IDU1c16366af173fa148931a28b189e8eca412f3.pdf ↩︎
7. https://www.sec.gov/newsroom/speeches-statements/gensler-21st-century-act-05222024 ↩︎