Federal Reserve Chair Jerome Powell has unequivocally stated that the US Central Bank is legally prohibited from holding Bitcoin, despite President-elect Donald Trump’s proposal to establish a strategic Bitcoin reserve. This stance has implications for the cryptocurrency market and the future of digital assets in the United States.
Federal reserve’s legal constraints
During a press conference on December 18, 2024, Powell addressed the possibility of the Federal Reserve adding Bitcoin to its balance sheet. He clarified that such an action is not permissible under current legislation:
“We’re not allowed to own Bitcoin. The Federal Reserve Act says what we can own, and we’re not looking for a law change,” Powell stated. “That’s the kind of thing for Congress to consider, but we are not looking for a law change at the Fed.”
The Federal Reserve Act delineates the types of assets the central bank can hold, primarily focusing on government securities and certain other financial instruments. Cryptocurrencies like Bitcoin do not fall within these categories, thereby legally restricting the Fed from purchasing or holding them.
Trump’s proposal for a Bitcoin reserve
President-elect Donald Trump has been vocal about his intention to create a US strategic Bitcoin reserve. On December 12, he remarked,
“We’re gonna do something great with crypto because we don’t want China, or anybody else … but others are embracing it, and we want to be ahead.”
The proposal suggests that the US could leverage its existing Bitcoin holdings, acquired through law enforcement seizures, and potentially make additional market purchases to establish a substantial reserve. Supporters argue that this move could position the US as a leader in the rapidly evolving digital asset space.
Legislative efforts and challenges
In alignment with Trump’s vision, Republican Senator Cynthia Lummis has introduced a bill proposing the creation of a Bitcoin reserve. The legislation suggests that the Federal Reserve and the Treasury Department purchase 200,000 Bitcoins annually over five years. However, this initiative faces significant hurdles, including legal constraints and institutional resistance. The Federal Reserve has consistently expressed skepticism about the stability and utility of cryptocurrencies, focusing primarily on their implications for consumer and banking sector safety.
Market reactions and economic implications
Powell’s reaffirmation of the Fed’s position had an immediate impact on the cryptocurrency market. Bitcoin, which had recently reached a record high of $108,000, experienced a decline following his comments. The broader cryptocurrency market also saw a downturn, with major digital assets like Ethereum, XRP, and Solana recording losses ranging from 4% to 11%.
Analysts have noted that while the Fed’s stance may have caused a short-term market correction, Bitcoin’s resilience above the $100,000 mark could be interpreted as a sign of underlying strength. Santiment, a blockchain analytics platform, observed,
“Considering BTC has stayed above $100K (for the time being) and not dipped as aggressively as its normal fluctuations compared to the S&P 500, this can be interpreted as a sign of strength once the dust settles over the next 24-48 hours.”
Future prospects and considerations
The divergence between the Federal Reserve’s legal constraints and the incoming administration’s ambitions presents a complex scenario. Implementing a strategic Bitcoin reserve would require overcoming legal and institutional challenges, including potential legislative changes and addressing concerns about the volatility and security of digital assets.
