Tales From the Cryptosphere

Do we call this cryptomentum? The cryptocurrency market is experiencing a dramatic surge in the wake of Donald Trump’s election victory. Bitcoin has been closing in on $100,000, and the overall crypto market has gained over $1 trillion in value since November. Trump’s crypto-friendly rhetoric and stated plans to loosen regulations have generated optimism among investors and industry leaders, with significant implications for banks and traditional finance. Here are some trends we are tracking: 

Crypto Regulation Turns a Corner 

Trump’s re-election marks a pivotal moment for cryptocurrency regulation. The likely appointment of a new SEC chair signals a shift toward settlements of cases against major crypto exchanges like Binance and Coinbase, departing from current SEC Chair Gary Gensler’s enforcement-driven strategy. 

The anticipation of deregulation has already spurred record inflows into Bitcoin and Ether exchange-traded funds (ETFs). However, as previous enforcement actions have shown, an unregulated crypto environment can come with risks, including fraud. The 2022 collapse of FTX and its widespread market fallout highlight the dangers of insufficient oversight. 

Momentum Builds for a Federal Bitcoin Reserve 

One of the most ambitious ideas gaining traction under Trump’s leadership is the potential establishment of a federal Bitcoin reserve. Trump has expressed support for the concept, which is being championed by Senator Cynthia Lummis, who introduced a proposal to acquire up to 1 million Bitcoin over five years. Advocates of the reserve argue that it could act as a financial asset akin to gold, with the potential to reduce the national debt and enhance U.S. financial independence. 

However, critics are skeptical. Economists caution that Bitcoin’s volatility poses risks to taxpayers if the currency’s value were to decline sharply. The speculative nature of Bitcoin also raises questions about its suitability as a reserve asset. Nonetheless, the proposal has drawn significant attention from both supporters and detractors, signaling its potential impact on the U.S. financial landscape. 

Trump Takes Aim at Digital Dollars 

Trump’s stance on cryptocurrency extends to his opposition to central bank digital currencies. Trump supports the CBDC Anti-Surveillance State Act, which would limit the Federal Reserve’s ability to issue a digital dollar without Congressional approval. This position reflects concerns about privacy and government overreach, aligning with skepticism from industry leaders and privacy advocates. 

Globally, Trump’s anti-CBDC position could have ripple effects. The European Central Bank, for example, is actively developing its own CBDC, with plans to create a standardized digital payment system across the eurozone. With this in mind, some CBDC advocates fear that Trump’s position may embolden U.S. competitors while slowing domestic progress on modernizing payment systems. (For more on CBDCs, read the 2022 RMA Journal article “Pros, Cons, and Other Bank Considerations for a US Central Bank Digital Currency.”)