Experts saw a problem with Sen. Lummis' Bitcoin reserve plan
The U.S. legislator, Cynthia Lummis (R-WY), unveiled a proposal on Saturday striving to establish a Bitcoin reserve for the government, aiming to amass 1 million BTC within the forthcoming five years. Yet, is this objective realistically achievable?
An authority on the subject noted that the implementation strategy significantly deviates from what Lummis revealed at the Bitcoin 2024 conference. There, she mentioned that the acquisition of these coins would be financed through "excess reserves" from the country's twelve Federal Reserve banks.
George Selgin, the former director at the Center for Monetary & Financial Alternatives at the Cato Institute, said that the initiative isn't as grandiose as initially presented.
While the specifics of Lummis' strategy remain under wraps, Selgin, following discussions with Lummis' team, indicated that the plan "indirectly" involves the Federal Reserve and is utterly unconnected to "bank reserves."
He elucidated that in reality, the strategy involves the U.S. Treasury procuring 1 million Bitcoin, which equates to approximately $64 billion according to current valuations.
According to Selgin, a portion of the funding for this purchase would come from reassessing the value of the Treasury's gold stored at Fort Knox, which, based on current market rates, is valued at $353 billion. This figure is vastly greater than the present book value of its gold, a discrepancy he attributed to an "accounting illusion" steming from the outdated Bretton Woods system, a time when the dollar held greater value.
Selgin described that this reevaluation would entail the Treasury issuing new gold certificates to the Federal Reserve that reflect the actual worth of its gold reserve. Subsequently, the Fed would enhance the Treasury General Account (TGA) by an additional $347 billion, aligning with the increased liabilities from the gold certificates.
With this boosted funding, the Treasury would possess adequate resources to secure 1 million BTC—at least at the current market rates.
Selgin remarked that this revised approach is indeed viable. However, Selgin still harbors reservations regarding the scheme.
He expressed concern that establishing such a reserve might jeopardize the stability of commercial banks nationwide. He explained that each dollar withdrawn from the TGA ends up in commercial bank reserves, which are assured to accrue interest from the Federal Reserve.
In periods of high interest rates, banks are incentivized to keep their funds in these reserve accounts due to the attractive 5.4 percent yield currently on offer. To support this yield to its banks, the Fed typically relies on dollar-denominated, interest-bearing assets like U.S. Treasury bills, which offer a similar annual return.
Under Lummis' proposal, however, the Federal Reserve would lack Treasury bills to support the growth in commercial bank reserves. Instead, it would only possess gold certificates issued by the U.S. Treasury, which do not accrue interest.
Above all, Selgin's primary doubt concerns the necessity for the Treasury to hold any gold or BTC in the first place. Rather than maintaining a stockpile, he proposed that the Treasury should sell its existing gold reserves to directly reduce its debt or fund alternative projects.
