Tim Steller's column: Arizona winning crypto-fund race. Is that a good thing?

We already had to start figuring out whether it’s a good idea to have a federal “strategic crypto reserve.”

President Trump ordered March 6 that this reserve be established, but most people don’t get what that means or why it’s controversial.

And now we have to decipher whether it’s a good idea for the state to have its own crypto fund?!

Yes, we do.

We can blame Rep. Jeff Weninger for that, along with a couple of state senators. In fact, Arizona appears to be leading the race to become the first state with its very own crypto reserve. One bill-tracking website, bitcoinlaws.io, puts Arizona’s crypto-reserve bills as being closer to law than the similar bills in about 20 other state Legislatures.

That isn’t necessarily a good thing, nor necessarily bad. I would call myself a crypto skeptic and worried about too many Americans putting too much money in valueless digital “coins.” But I’m not so much of a skeptic that I discount any effort to liberalize how the state handles these digital currencies. It’s all a question of what you do and how you do it.

Weninger, a Republican and chair of the House commerce committee, is gung-ho about crypto but has written relatively narrowly drawn bills, different from the herky-jerky federal effort.

“Arizona is on the brink of becoming a national hub for blockchain and digital asset innovation,” he asserted in a press release. “These bills represent our commitment to fostering an environment that not only embraces modern technology but also drives economic benefits across the state.”

One bill, HB 2324, allows the state to seize bitcoin and other cryptocurrencies in any other criminal or civil case in which forfeiture of assets is permitted. Then it lays down rules for where the crypto goes: The first $300,000 worth goes to the Arizona attorney general’s office, which may distribute it to other law-enforcement entities.

Of any remainder, 50% also goes to the AG’s office, 25% to the state’s general fund and 25% to a new Bitcoin and Digital Assets Reserve Fund.

It’s that last bit, the establishment of the reserve fund, that would be groundbreaking for Arizona. That’s because it allows the state treasurer to keep the crypto in its existing form, not necessarily liquidate it for dollars. But in this case, the Legislature could appropriate whatever is in the reserve fund as it sees fit, which is key.

‘A little wonky’

Weninger referred to another of his bills, HB 2749, as “a little wonky but a good and important bill” in an interview with me. It would require the state to keep unclaimed crypto in its native form rather than selling it and keeping it as dollars.

You may know that the state ends up with unclaimed property — bank accounts, stocks, tax refunds — and must hold onto it for years in case someone claims it. In the case of cryptocurrency, the state has been converting it to dollars. This bill would have the state keep cryptocurrency in its “native” form, meaning it could increase or decrease in value while waiting to be claimed.

It would go further though, and allow the state to make money off the unclaimed crypto by “staking” it, a move that locks the cryptocurrency in digital “wallets,” for a period and earns returns. These returns would then go into the state’s new Bitcoin and Digital Assets Reserve Fund.

Another Weninger bill, HB 2325, would allocate $1 million to have the state begin a pilot project of putting spending in one department, the Arizona Department of Administration, on a blockchain distributed ledger, theoretically allowing for nearly real-time transparency into state spending. Finally, his HB 2654 would establish the Arizona Cryptocurrency and Blockchain Commission to advice on future policies.

A digital spoils system?

Going through those technical bills is less fun, and more sober, than reviewing Donald Trump’s posts about cryptocurrency on social media. Trump has proclaimed himself the crypto president but surprised that industry by posting March 2 that he would establish a federal crypto reserve containing a variety of cryptocurrencies, not just the most defensible one, bitcoin.

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For many, it was a signal that he would treat the industry as part of a spoils system, the same frivolous way that he did when he launched a “memecoin” in his own name days before becoming president. That pump-and-dump effort made apparent insiders millions and cost many retail investors equivalent millions. It was, in a word, another Trump scam.

He also framed the decision to establish a federal crypto reserve as an effort to boost the industry, rather than to benefit American citizens, saying his order “will elevate this critical industry after years of corrupt attacks by the Biden administration.” (What he called corrupt attacks were the Biden administration’s efforts to regulate an industry rife with fraud and protect consumers.)

When Trump finally issued his executive order, though, it was much more limited than expected. He established a Strategic Bitcoin Reserve and a United States Digital Assets Stockpile. Both will consist only of seized assets, the latter stockpile containing everything but bitcoin.

That’s good — there’s no reason to spend taxpayer money on any cryptocurrency. It would just be a direct financial reward to an industry that massively supported Trump in his campaign, and it would put that money at risk.

As Dennis Kelleher wrote in a Barrons piece, titled “Trump’s Crypto Plan is Neither Strategic nor a Reserve”:

“Strategic reserves are an accumulation of additional supply in non-emergency times to be released to move prices down for a vital product in an emergency. However, crypto holders generally want the price to go up. The pressure will be on the government to add to the reserve, not to release it (which would depress prices). Future taxpayer bailouts of the crypto industry are a real concern.”

Indeed, David Sacks, Trump’s top crypto adviser, said on social media: “The U.S. will not sell any bitcoin deposited into the Reserve. It will be kept as a store of value.”

Our newly elected U.S. senator, Ruben Gallego, has become a relatively important figure in crypto thanks to his position as the top Democrat on the Digital Assets Subcommittee of the Senate Banking Committee. It didn’t hurt that crypto helped get him elected: The industry put $10 million toward his election.

Still, Gallego told me he opposes the strategic crypto reserve idea.

“I think we have to study the full extent of what happens when you inject crypto into the economy, before you do something that drastic. I also think because crypto is still not as prevalent, it can easily be manipulated by massive holders of different crypto coins. So putting in a reserve could actually give someone a lot of power over, the fluctuation of our dollar, as well as potentially the economy.”

Some rules of the road

Over months, I’ve read books and articles, and listened to podcasts about crypto, because I’m worried about and fascinated by this phenomenon. It’s easy to dismiss much of it because there are so many frauds and pump-and-dump scams, such as Trump’s coin, and so many other cryptocurrencies that have no solid basis for their value.

I’ve come away skeptical, as I said, but not wanting to stifle the potential good of some of these innovations. So my idea is to stick with a few principles in deciding whether the governments, state and federal, should get involved with crypto beyond their roles as regulators:

1. Don’t invest any public money in buying any cryptocurrency, even bitcoin. There simply is no need and far too much opportunity for corruption, as well as volatility in prices.

2. The only cryptocurrency that the state should consider possessing in its original form, now, is bitcoin, because it is the most resistant to manipulation.

3. There should be no limitation on a government entity that possesses bitcoin or any other currency from liquidating it and spending it.

Any proposal that adheres to these principles, I think, ought not to be dismissed outright. But we need to keep a watchful eye on every “strategic reserve” proposal because they pose such a big threat of losses and corruption.