Will crypto trump the CBDC?

Does the re-election of Donald Trump mean a new dawn for cryptocurrencies and a fresh setback for the idea of a central bank digital currency? Christopher Alkan reports on the debate

Cryptocurrencies such as bitcoin and dogecoin are often spoken about in the same terms as central bank digital currencies (CBDC). But the two concepts are in many senses polar opposites. Proponents of cryptos are frequently attracted by their supposed potential to liberate financial transactions from government influence. By contrast, CBDCs could vastly expand state control over the economy, allowing officials to monitor transactions in real time, stamp out financial crime and even issue money that must be spent in a limited period – boosting the potency of fiscal stimulus.

The return of Donald Trump to the White House may mean a victory for the former over the latter. The president is a recent convert to the crypto fan club. In 2021, he described bitcoin as a “scam” that was “competing against the dollar”. And a few years earlier, he observed that cryptos more broadly were “highly volatile” and “based on thin air”. However, last July, speaking at the Bitcoin 2024 conference in Nashville, he declared his intention to “make America the crypto capital of the world”.

Donald Trump has a history of floating audacious policy ideas that are never implemented. This makes him hard to predict on crypto

Trump’s most prominent donor, entrepreneur Elon Musk, has a more sustained record of enthusiasm for crypto and looks set to be an important voice in the new administration. The advisory body he has been appointed by Trump to co-lead – the Department of Government Efficiency, or Doge – is seen as a playful reference to dogecoin, a crypto that Musk has promoted. His electric carmaker, Tesla, even briefly accepted bitcoin as payment, before withdrawing this offer because of the energy consumption involved in mining the crypto.

This backdrop helps explain why, as of the second week of January, the value of bitcoin has jumped around 40% since the US presidential election, hitting record highs. (At one point in late December it was up close to 60% and above $100,000 for the first time.) While Trump and his associates have not explicitly discussed crypto’s nemesis – CBDCs – it seems fair to assume a degree of hostility.

That leaves the question of how far the incoming administration and Republican-controlled Congress could go in enabling the use of crypto. And has the idea of a Fed-coin been kicked into the long grass for the next few years?

Crypto industry participants who donated money to Trump’s campaign – including the Winklevoss twins, who founded Gemini crypto exchange – have a long wish list. This ranges from a relaxation of regulatory oversight to the establishment of a US bitcoin strategic reserve and various gradations of making bitcoin legal tender.

“The saying that politicians ‘campaign in poetry and govern in prose’ applies even more to Trump than most,” says Marc Chandler, Chief Market Strategist at Bannockburn Global Forex. “He has a history of floating audacious policy ideas that are never implemented. That makes it especially challenging to predict what he might do on crypto. That said, it’s reasonable to expect more pro-crypto policies.”

Trump has already made a start with the most basic level of support that crypto fans were expecting – notably the appointment of regulators who are more crypto-friendly, especially Paul Atkins, the incoming Chair of the Securities and Exchange Commission (SEC). The outgoing SEC Chair, Gary Gensler, has been a notable sceptic, describing crypto as the “Wild West”, that is “rife with fraud, scams and abuse”. Under his leadership, the SEC only approved a bitcoin exchange-traded fund under duress after losing a court case.

When Trump addressed the crypto conference in July, he promised that “from now on the rules will be written by people who love your industry”. He has named David Sacks as the White House’s AI and Crypto czar, tasked with creating a legal framework to promote the growth of these industries. Under such sympathetic leadership, it seems probable that exchange traded funds (ETFs) based on a wider range of digital tokens will be given the green light in the US, including solana, Ripple’s XRP and litecoin. That means consumers could be exposed to highly volatile assets without real awareness of the risks. That step alone could eventually be painful for many savers and investors.

The question is whether a Trump administration could then consider bolder actions to promote crypto. One more audacious plan that Trump floated was a “strategic national bitcoin stockpile”. Republican Senator Cynthia Lummis proposed such a fund, in her BITCOIN Act of 2024 – an acronym for Boosting Innovation, Technology and Competitiveness through Optimised Investment Nationwide. Her argument was that government purchases of bitcoin would signal US commitment to financial leadership and could eventually be used to pay down the national debt –potentially cutting it by half within two decades, she claimed.

This proposal has been greeted with enthusiasm by parts of the crypto industry, but more mainstream financial institutions are sceptical. “It is not clear how this would promote the public interest,” says Greg Hertrich, Head of US Depository Strategies at Nomura. “This would be a significant departure for the US government.”

The US government does not have a sovereign wealth fund – and such institutions tend to invest in a diversified range of assets rather than highly volatile cryptos. “No sane economist thinks that using taxpayer money to drive up the price of bitcoin would help anyone other than existing bitcoin owners,” argues David Birch, a digital finance expert.

Despite a host of possible objections, betting exchange Polymarket – which proved a better gauge of the 2024 election outcome than the polls – assigns a 27% chance, as of 9 January, that the US will establish a bitcoin reserve in the first 100 days of a Trump administration. (As an aside, the US government is estimated already to hold around 120,000 bitcoin seized from criminal ventures, so a reserve could merely legally recognise this stash.) More audacious still would be a move to make crypto legal tender. The definition of legal tender is narrow and, somewhat counter-intuitively, it doesn’t cover many day-to-day means of payment such as commercial bank money. But it is one that anchors a country’s fiat currency and helps make it possible for central banks to implement monetary policy.

Having competing units of currency would confuse consumers and businesses, as well as complicating monetary policy

Legal tender is the form of payment that “a creditor is legally obligated to accept… toward repayment of a debt”. “If you offer to fully pay off a debt to someone in legal tender, they can’t sue you for failing to repay,” as the Bank of England puts it. That means finality of settlement and the benefits of the singleness of money. That is, the different forms of sterling, such as coins and money in bank accounts, are exchangeable at par, and sterling can fulfil the role of money as a store of value, a unit of account and a medium of exchange.

El Salvador famously took the step of making bitcoin legal tender in 2021. Other authorities have nudged in this direction, including the Swiss Canton of Zug, which allows individuals to pay their tax bill with either bitcoin or ether, up to a maximum of 1.5m Swiss francs.

“There would be many hurdles to clear here, and moving in this direction would require approval by the President, Congress and the courts,” says Hertrich. “It is a real stretch to imagine that the incoming president would be willing to devote sufficient political capital to such a complex task.”

Making crypto a universally valid form of payment would, for example, require changes to the tax code, since the Internal Revenue Service views every bitcoin transaction as a taxable event. Given the decentralised nature of cryptos, anti-money laundering rules would require a revamp, and greater government surveillance would dilute the anonymity that many bitcoin enthusiasts cherish.

Finally, steps toward making bitcoin or ether legal tender would present additional risks to the financial system. “There is a reason that countries tend to have only one currency,” says Chandler. “Having competing units would create confusion for consumers and businesses, as well as complicating monetary policy. A parallel currency would certainly undermine the Federal Reserve’s ability to carry out its mandate to promote price stability and maximise employment.”

Bold steps to integrate crypto into the US financial system would require a lot of heavy lifting from the Trump administration. However, halting progress toward a CBDC is likely to be effortless. While the People’s Bank of China’s e-CNY digital renminbi has seen increasing use, top Fed officials have been more than a little reticent about an e-dollar. Earlier this year the Chair of the Federal Reserve, Jerome Powell, said the Fed was “nowhere near recommending, let alone adopting, a central bank digital currency in any form”.

Worries of government over-reach appear to be part of the reason for his reluctance. Speaking to senators, Powell said that an official digital token raised the concern that “the government would see all your transactions”, adding, “that’s something that we would not stand for”.

Setting up a CBDC also requires careful design. The digital renminbi does not, for example, disintermediate banks as the creators of money, which is what crypto aims to do. It is explicitly a liability of the People’s Bank of China, not a ‘freedom’ coin.

Freedom, of course, is a relative concept and bitcoin sceptics would argue that embracing crypto too enthusiastically creates the opposite danger: that the US government would surrender too much visibility and control over the US financial system. Who would be in control then? Quite possibly not the legislature that voters elected.

Christopher Alkan is a financial journalist