Answer: Will the Fed and Powell block the US National Bitcoin Reserve?

Author: Jason Jiang & Hedy Bi, Ouke Cloud Chain

Early this morning, Federal Reserve Chairman Powell made it clear at a press conference after the monetary policy meeting that the Federal Reserve has no intention of participating in any government plan to hoard Bitcoin. He emphasized that such issues fall within the purview of Congress and that the Fed is not seeking to change existing laws to allow the holding of Bitcoin. Powell's comments immediately triggered market turmoil, and Bitcoin prices quickly retreated from the highs at the beginning of the week. According to the information prediction market Polymarket, after Powell's speech, the probability of Bitcoin strategic reserves dropped from 40% to 34%, the highest point on the 18th. The market value of the crypto market also fell rapidly, with the overall market value evaporating by approximately 7.5%.

Image source: Polymarket

This statement not only made the market confused about the prospects of the "Bitcoin Strategic Reserve (BSR)", but also focused people once again on a deeper question: Does the Federal Reserve really have the power to block the BSR plan?

First, we need to clarify the role of the Federal Reserve in the U.S. financial system. The parent agency of the Federal Reserve is the U.S. Congress: Congress is the highest authority of all financial regulatory agencies. It formulates financial regulations and policies through legislation and authorizes other financial institutions (such as the Securities and Exchange Commission and the Federal Reserve) to perform their functions. In the U.S. financial market, monetary policy and fiscal policy, as the two core tools of government economic management, are responsible for the Federal Reserve and the Treasury Department respectively. These institutions ensure the smooth operation of the U.S. economy and finance through mutual checks and balances while also maintaining independence from each other.

The Federal Reserve enjoys a high degree of independence in monetary policy and national economic stability, but it cannot "veto" decisions on establishing the BSR.

If the Trump administration wants to quickly establish BSR, the most direct way is to sign an executive order after officially taking office, instructing the U.S. Treasury Department to use the Exchange Stabilization Fund (ESF) to directly purchase Bitcoin. The ESF is a special fund managed by the U.S. Department of the Treasury. It is mainly used for foreign exchange market intervention, supporting the stability of the U.S. dollar and responding to international financial crises. It currently includes assets such as the U.S. dollar, Special Drawing Rights (SDR), and gold. The fund's operations are outside the control of the U.S. Congress, and the president and the Treasury Department have significant autonomy over its use. In theory, the president can directly instruct the Treasury Department through an executive order to adjust the way ESF funds are allocated to purchase or reserve specific assets, and bypass direct appropriation approval from Congress, reducing political resistance. The executive order recently drafted by the Bitcoin Policy Institute hopes to establish BSR in this way.

Image source: Bitcoin Policy Institute

This method is the easiest to implement, and the use of ESF funds does not require prior congressional approval, but Congress can restrict its operations through investigations or legislation. During the COVID-19 epidemic in 2020, Congress proposed strict restrictions on some fund operations of the Treasury Department. In addition, the sustainability of the BSR established through executive orders is questionable, because executive orders are essentially an expansion of administrative power, and successors may annul or modify previous relevant decisions through new executive orders.

If you want to establish and maintain the long-term stability of the BSR, you need to choose another path, which is to pass Congressional legislation to include Bitcoin in the Strategic Reserve Act or similar laws to clarify Bitcoin's status as a national strategic reserve asset. This approach has greater legitimacy and creates a long-term framework for Bitcoin reserves. The "U.S. Bitcoin Strategic Reserve Act" previously proposed by Republican Senator Cynthia Lummis chose this path. The bill has been formally submitted to Congress and will be reviewed by the Senate Banking Committee. It will be reviewed and approved by the Senate, House of Representatives and the President before the legislation can be officially completed. So building a strategic Bitcoin reserve through this path will take longer and may encounter various resistances along the way.

Whether the strategic Bitcoin reserve is established through a presidential executive order or congressional legislation, judging from the plans that have been disclosed so far, the implementation will ultimately need to be led by the Treasury Department, not the Federal Reserve.

Image source: Congress.gov

In addition to the above options, the Federal Reserve and the Treasury Department can theoretically choose a middle path for Bitcoin allocation. The Fed can purchase Bitcoin through open market operations and add it to its balance sheet. Due to its relative independence, the Fed's actions do not need to pass Congress, but it does need a clear policy framework to support its purchase of Bitcoin. Coupled with the recent statements by the Federal Reserve, it seems unlikely that this plan will be implemented in the short term. The Ministry of Finance can invest in Bitcoin as part of its fiscal investment plan by setting up a special fund. Although the existing legal framework will not be changed, relevant financing requires congressional approval.

No matter how it is promoted, "the Fed says no" cannot negate BSR's proposal in one word, and Trump's doers have even supported it with actions. According to on-chain data, within two minutes of Powell starting his speech, World Liberty, the Trump family’s encryption project, quietly moved to buy alt-cryptocurrencies. This scene undoubtedly reveals a deeper game: on the one hand, the Federal Reserve’s cold response to the Bitcoin strategic reserve plan shows the government’s cautious attitude towards emerging assets; on the other hand, the pace of the Trump family’s encryption project reveals the traditional The delicate struggle between power and market innovation. The subtle game between the government, traditional finance and the encryption market may be the prelude to the future fate of the encryption market.