Trump’s crypto reserve plan is a warning shot to rival nations

The President of the United States loves Bitcoin. Donald Trump says that the cryptocurrency – invented by the mysterious Satoshi Nakamoto in 2008 – will be included in a strategic reserve of digital assets that his administration plans to create.

Bitcoin has been the most well-known and, at times highly controversial, digital asset, while the true identity of the person or persons behind Satoshi Nakamoto remains inconclusive.

Its origins are related to how, with the advent of the World Wide Web, it became easy to create digital information and, with the increasing volume of it, just as straightforward to replicate and copy all of it. The internet held the promise of easy and direct commerce between individuals. But to enable this, a problem to be solved was how to ensure rightful and legal ownership of something digital. Without a solution, a huge obstacle to the expansion of the digital economy would remain.

But just as the physical financial system went into meltdown following the failure of Lehman Brothers bank, a whitepaper Nakamoto authored was published online. It proposed Bitcoin as an incentive for ordinary people to run a system of digital payments that would not need a trusted third party – for instance, a bank – to process and handle the transactions.

Using their computer power, participants in the Bitcoin system race to solve a puzzle to verify each block in a chain of transactions. The first one to do so receives some Bitcoin as a reward for their efforts and also to compensate for any cost, including electricity. With millions of computers working to build the Bitcoin blockchain – each transaction visible to all – it would be too difficult to overpower the system and alter a transaction fraudulently. Working successfully, you would then no longer need an institution or government to guarantee anything.

It was a vision for a future financial system defined by radical transparency and equality. But since then, Bitcoin has developed supporters and detractors of matching ferocity. Its backers hold on to it for dear life through volatility and scandals, while those who oppose them fear its use by criminal networks and challenge its utility and value.

During his election campaign last year, Mr Trump vowed to begin a new, benign era for crypto.

In January, he used his authority to issue an order “to promote United States leadership in digital assets and financial technology while protecting economic liberty”. The order highlighted how “the digital asset industry plays a crucial role in innovation and economic development in the United States, as well as our nation’s international leadership”. Most significantly, this was linked to “promoting and protecting the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”.

It also pledged “measures to protect Americans from the risks of Central Bank Digital Currencies [CBDCs], which threaten the stability of the financial system, individual privacy, and the sovereignty of the United States, including by prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States”. Thus, the order banned the use of any digital asset backed by other large economies – such as China, India, Russia, Japan and the EU – that are trialling their use as they explore ways to reduce global dependence on the US dollar.

Over the past year, a consensus has formed that de-dollarisation is an unstoppable force. According to the Atlantic Council’s Dollar Dominance Monitor, “The US dollar has served as the world’s leading reserve currency since World War II. Today, the dollar represents 58 per cent of foreign reserve holdings worldwide. The euro, the second-most-used currency, accounts for only 20 per cent of foreign reserve holdings".

But the report also pointed out that in recent years – particularly since Russia’s full-scale invasion of Ukraine and the G7’s subsequent escalation in the use of financial sanctions – a number of countries have signalled their intention to accelerate efforts to diversify away from dollars.

Mr Trump has threatened these efforts, including with 100 per cent tariffs on goods from any country pursuing de-dollarisation. Simultaneously, he is closing the door on any chance of the growth of digital assets becoming a Trojan Horse to replace the dollar by championing cryptocurrencies that are unaffiliated to other nations.

“A US Crypto Reserve will elevate this critical industry after years of corrupt attacks by the [previous Joe] Biden administration, which is why my Executive Order on Digital Assets directed the Presidential Working Group to move forward on a Crypto Strategic Reserve that includes XRP, SOL and ADA,” Mr Trump added, referring to the cryptocurrencies being added to the reserve. “I will make sure the US is the Crypto Capital of the World. We are making America great again!”

Mr Trump posted on social media last weekend before following up with another one: “Obviously, BTC and ETH, as other valuable cryptocurrencies, will be the heart of the Reserve. I also love Bitcoin and Ethereum!”

Critics of the move point to conflicts of interest and also the danger of creating a bubble in these assets.

According to Yanis Varoufakis, an economist and the former finance minister of Greece, in order to accomplish his economic goals Mr Trump needs the seemingly contradictory outcomes of a weaker dollar to spur American exports, while maintaining its power as the dominant currency, which gives him political leverage over rival nations. In other words, he needs large economies to reduce their dollar holdings for the currency to be weakened, but also not seek to supplant it with another fiat currency.

By promoting Bitcoin, Ethereum and other cryptocurrencies, the US President ensures that his country’s rivals are even further constrained from challenging its financial dominance through this emerging technology.