This article first appeared in Wealth, The Edge Malaysia Weekly on January 27, 2025 - February 2, 2025

Bitcoin may have finally gained a foothold in mainstream investing. Last year, the cryptocurrency outperformed some of the traditional “safe haven” assets when it rose 120%.

For some years, Bitcoin and other digital currencies have borne the stigma of being associated with money laundering and scams but this perception is changing rapidly. This is based on the increased buy-in of institutional investors and the possibility of the US government and the Federal Reserve using the cryptocurrency as a strategic reserve to safeguard the national interest.

The BITCOIN Act, also known as the Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide Act of 2024, seems to have a fair chance of being enacted with US President Donald Trump having taken office.

Introduced by US Senator Cynthia Lummis in July last year, the legislation proposes, among others, the establishment of the Strategic Bitcoin Reserve (SBR) and a plan for the US government to acquire up to one million bitcoins over five years, while capping purchases at 200,000 bitcoins a year. The US Treasury will hold these coins for a minimum of 20 years before selling them to pay down federal government debt.

The fate of the BITCOIN Act is being closely watched by investors as it would see the US government purchasing up to 6% of the total Bitcoin supply in the years to come, creating a huge and lasting impact on prices and the overall cryptocurrency market.

(Industry experts say there are currently about 19.8 million bitcoins in circulation, 20% of which, or about four million, may be lost. The total supply of the cryptocurrency is currently capped at 21 million. Hence, a million bitcoins represent about 6% of the total supply.)

The question is whether other countries and central banks will follow in the footsteps of the US and the implications this will have on the global financial system.

Industry players, including an economist, consultant, fund managers and digital asset exchange (DAX) operators, who spoke to Wealth have mixed views on the proposed Act.

On the local front, Bank Negara Malaysia has no intention to include Bitcoin as part of its strategic reserves, according to its email response to Wealth on Jan 10. Its main concern is the cryptocurrency’s volatility and speculative nature.

“The strategic reserves play a critical role in preserving macroeconomic and financial stability, maintaining orderly financial market conditions and upholding market confidence. Therefore, the reserves remain allocated to financial assets such as gold and foreign currency reserves, rather than to crypto assets like Bitcoin, which have significant levels of volatility and speculative profiles.”

Bank Negara says it is working with the Securities Commission Malaysia (SC) to ensure that crypto asset activities comply with relevant laws and regulations under the purview of both regulators, such as the anti-money laundering and countering financing of terrorism regulations and foreign exchange policy.

“Within the broader digital space, there has been increased focus on the potential of the underlying blockchain technology to drive innovation and efficiencies in the regulated financial sector. Asset tokenisation and central bank digital currency (CBDC), in particular, have emerged as key areas of interest among global regulators. In these areas, Bank Negara is also exploring potential use cases for financial services, in collaboration with the financial industry and the SC,” says the central bank.

Christopher Jensen, director of digital asset research at Franklin Templeton (FT), says the possibility of the Act being enacted is low at the moment. A key reason is price volatility, which resonates with Bank Negara’s statement.

FT is a global investment firm with assets under management of US$1.63 trillion as at October 2024. It launched the Franklin Bitcoin ETF in January last year.

“I still think the odds of the bill passing [by the US Congress] in the current form remains low. The sheer scale of the proposed programme, lingering concerns about Bitcoin’s volatility and the potential resistance from entities like the Fed, all present hurdles,” he says.

“That said, we do see a reasonable chance that the US could move forward with a more measured approach, for example, retaining rather than auctioning off seized bitcoins as part of a strategic reserve. Such a step would still mark a significant policy shift and help position the US to compete with other countries exploring or expanding with their own Bitcoin reserves.”

According to data provided by Arkham Intelligence, a firm that operates a crypto exchange platform and public data application, the US government possessed about 198,109 bitcoins as at Jan 17, which it seizes from an illicit marketplace.

Jason Lee, executive director, CEO and chief investment officer of boutique asset management firm Cross Light Capital that manages the Performa Digital Asset Fund, does not expect the bill to be passed in the near term as the programme would cost the US government US$100 billion at US$100,000 per bitcoin, a large amount even for the government of the world’s largest economy.

“Our working hypothesis is not to anticipate such large purchases [by the US government and central bank] and hence, our view is that it is unlikely that the bill in its current form will pass [by the US Congress],” he says.

Nevertheless, he shares Jensen’s view that the US government, through its Department of Treasury, could opt to deposit its existing bitcoins which it obtained through seizure of criminal activities, instead of selling or liquidating them.

A crypto consultant and economist both point out hurdles that could prevent bitcoins from being used as a strategic reserve.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, says Bitcoin lacks intrinsic value, unlike gold or fiat currencies backed by governments, which is why its value is purely speculative and based on market demand. This makes it risky for use as long-term reserve holdings for a government.

The blockchain technology keeps Bitcoin secure, but its ecosystem comprising exchanges and digital wallets remains vulnerable to hacking and theft, which poses significant risks for large-scale reserve holdings, he adds.

Moreover, using Bitcoin as a strategic reserve could have knock-on effects on market confidence in the US dollar arising from the cryptocurrency’s volatility, says Yeah.

“The adoption of Bitcoin as a strategic reserve could inflate its prices, but the speculative bubble will burst eventually. Depending on the size of the Bitcoin holdings, the reserve backing for the US dollar will fall correspondingly,” he points out.

“An unstable international currency will reduce its usefulness as the currency of choice for international trade and transactions. Hence, it will motivate countries to reduce dependence on the US dollar as evidenced by the BRICS’ (Brazil, Russia, India, China and South Africa) de-dollarisation strategy.”

Edmund Yong, resident consultant who specialises in crypto, financial technology (fintech) and blockchain at GLT Law, agrees that the adoption of Bitcoin as a strategic reserve could have the effect of hastening the de-dollarisation trend.

“Emerging markets and developing economies with weak currency systems have more reason to migrate [their reserves] to Bitcoin as a store of value. Governments are further emboldened to build alternative dollar-free payment systems, such as those mentioned by BRICS,” he says.

There is also a bigger question surrounding its impact on financial stability which, again, brings back the point of extreme price volatility, says Yong.

“The conventional financial system does not have significant exposure to crypto and isn’t interconnected with it. But if Bitcoin is elevated as a national reserve asset and accepted mainstream, there are unchartered implications on systemic risk and contagion.

“For instance, any outsized drop in Bitcoin prices may be amplified in a vulnerable financial system and force asset liquidations and fire sales. The ultra-high speed and frequency of Bitcoin trades, which happens 24/7 in each day throughout the year globally, and without circuit breakers, allow little response time for intervention and stabilisation.”

Hyperinflation in Bitcoin prices would cause complex economic issues for countries with weak currencies, such as driving the masses to hold the cryptocurrency rather than the fiat currency of their own country, causing central banks to lose control of monetary matters, which is already happening in some parts of the world.

Despite various concerns, the ground is shifting for the cryptocurrency industry. Several industry players see higher odds of the Act being enacted under Trump’s presidency than otherwise.

While Yong has reservations on Bitcoin being adopted as a strategic reserve of the US government, he says the BITCOIN Act is likely to be enacted as crypto lobbyists spent a tremendous amount of funds on Trump’s campaign, resulting in him promising to make the US “the crypto capital of the planet”.

“I believe the bill is likely to be passed because this is, by some accounts, the most pro-crypto Congress in US history. The crypto industry is one of Trump’s biggest clients on K Street (a term primarily associated with political lobbying and influence) which spent over US$130 million on political lobbying, which seems to be paying off big time. But there could be holdouts in the Senate,” he says.

Aaron Tang, Luno general manager for Asia-Pacific, says the Republican Party has taken control of both the US House of Representatives and the Senate. The majority of the Republican House and Senate members also threw their support behind Trump during the presidential campaign.

“This allows the incoming Trump administration to drive its pro-crypto, pro-business agenda with the support of Congress and on the back of winning the popular vote and by flipping key states,” he adds.

Hann Liew, co-founder and CEO of digital asset fund management firm Halogen Capital, places the odds of the bill being passed by the US Congress at above 50%, which is likely to happen during the latter part of Trump’s presidency.

“Our house view is that there is a very low possibility that the bill will be passed this year. But throughout Trump’s term as president, I would say it is higher than 50%. He has a lot of things to work on right now, including his trade, tariff and immigration policies. Bitcoin is probably the third or fourth on his priority list, which counts as one of the lower ones,” he says.

Liew’s prediction stems from the fact that Trump owes his win to single-issue voters who cast their votes during the US presidential election purely based on the candidate’s stance on cryptocurrency.

“Trump realised that it didn’t cost him much to be pro-crypto, but he could actually lose votes being anti-crypto, as there was somewhere between 1% and 3% of the US electorate who were single-issue voters who voted based on whether an administration would be pro- or anti-crypto,” he says.

Signs are showing that Trump could push through the BITCOIN Act, according to industry players. Paul Atkins, a pro-crypto figure, was nominated by Trump to chair the US Securities and Exchange Commission (SEC), to replace Gary Gensler, who is deemed anti-crypto.

Online information shows that Atkins was a former SEC commissioner appointed by former US president George W Bush. He founded Patomak Global Partners, a consultancy firm specialising in regulatory compliance and risk management, after his tenure at the SEC from 2002 to 2008.

Trump said he was appointing former PayPal chief operating officer David Sacks as his “White House AI and Crypto Czar” and nominated Scott Bessent, a former hedge fund manager, as Treasury Secretary. Both individuals are seen as pro-crypto.

“The incoming Treasury Secretary Scott Bessent is an ex-fund manager. As hedge fund managers ourselves, our hunch is that Bessent is keen to create a new monetary system. We believe the world is on the brink of abandoning the traditional system of money and accounting in favour of a digital system based on blockchain technology,” says Cross Light’s Lee.

Based on similar observations, David Low, co-founder and CEO of licensed DAX Hata, is of the view that the bill will be passed by the US Congress.

“I think it will definitely go through Congress, but it will take some time. Trump has signalled very strongly that he would like the US to be the world’s No 1 crypto hub. Not just No 2 or No 3, but the top,” he says.

There could be advantages for the US government in adopting Bitcoin as a strategic reserve, such as investment diversification, according to industry players. The cryptocurrency is increasingly viewed as “digital gold” by institutional investors, evidenced by its meteoric rise in price.

“I agree with [Fed chairman Jerome] Powell’s recent remark that Bitcoin can be viewed as a competitor of gold. In many ways, it serves as a better form of gold as it is far more transferable, verifiable and divisible,” says FT’s Jensen.

“Because so many sovereigns, including the US, already hold physical gold in their reserves, it’s a logical extension to view Bitcoin as a strategic asset and consider including it in those same reserves.”

The US, if it emerges as a forerunner in using Bitcoin as a strategic reserve, would stand to control a substantial part of the world’s reserve capital network, says Cross Light’s Lee.

“It would position the US as a leader in the emerging digital economy and maintain the US dominance, despite its high and unsustainable debt levels, especially if one includes its unfunded debt liabilities like healthcare and social security. As other countries see the US leading in Bitcoin adoption, they might follow suit,” he adds.

Responding to comments on Bitcoin as an intangible and volatile asset, and therefore not suitable as a strategic reserve, Halogen’s Liew says the world has ushered in an era where digital and intangible assets are no longer seen as of no value. The internet, for instance, is deemed intangible, but the economic value it creates is tremendous.

The internet, mining equipment and huge amounts of electricity have been used to secure the Bitcoin blockchain.

“The world is increasingly digitised today. Take Malaysia, the digital economy generated 23% of the country’s GDP in 2022 and is anticipated to grow over 25% in 2025. As the world’s economy evolves, central banks have to evolve,” he says.

Liew notes that investors who have held on to Bitcoin for more than four years have never lost money, and its price exceeded US$100,000 recently, more than 16 years after it was launched in 2008. This shows that the cryptocurrency is suitable for long-term investors.

He acknowledges that Bitcoin prices are volatile, but points out that gold prices had gone down more than 50% in its history. “Volatility happens because of supply and demand dynamics. But it doesn’t stop Bitcoin from being seen as a store of value,” he says.

The US government using Bitcoin as a strategic reserve is a major piece of news that contributed to the rally in its price. But it isn’t the only country making such a move.

The Brazil’s Congress is considering a Bitcoin reserve as a hedge against global risk, according to a news report by Cointelegraph, a media outlet that specialises in cryptocurrency. According to the report, Brazil Congressman Eros Biondini proposed a bill on Nov 25, 2024, seeking the creation of a sovereign strategic Bitcoin reserve known as RESBit.

Sunway University Business School’s Yeah says no country has formally and successfully embraced Bitcoin as a strategic reserve asset as yet. There were failed attempts by El Salvador and the Central African Republic.

“Several other countries such as Ukraine, Iran, Venezuela and a few other small economies have experimented with cryptocurrencies for specific reasons, such as bypassing sanctions, but not for diversifying reserve asset holdings,” he says.

Their reserve asset holdings remain principally in hard currencies, gold and Special Drawing Rights issued by the International Monetary Fund, says Yeah.

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