The Cryptocurrency Dilemma for Governments: Hoarding, Utilizing, and Offloading
17 April 2023
Cryptocurrencies have gained widespread adoption around the world, with governments also getting involved in the digital asset space. Some governments intentionally invest in cryptocurrencies, while others inadvertently end up holding significant amounts of crypto. In this article, we will explore how governments acquire cryptocurrencies, which governments are known to hoard crypto, the reasons behind their actions, what they do with their crypto holdings, and how they offload them.
Governments can acquire cryptocurrencies through various means, such as confiscation from criminals involved in illegal activities (i.e. money laundering or ransomware attacks). When law enforcement agencies seize these assets, they may hold them as evidence during legal proceedings. Governments can also receive cryptocurrencies as donations or grants from individuals or organizations. In some cases, governments will purchase or acquire these assets as part of their investment strategies (i.e. El Salvador).
Several governments have been known to hoard cryptocurrencies, with varying reasons behind their actions. One primary reason is the potential for capital appreciation. Governments may also view cryptocurrencies as a hedge against inflation or currency devaluation, particularly in countries with unstable fiat currencies. Another reason governments hoard cryptocurrencies is to gain strategic advantages. Cryptocurrencies can enhance a government's technological capabilities and competitiveness in the digital economy.
So, what do governments do with their crypto holdings? The answer varies depending on the government's objectives. Some governments may hold cryptocurrencies as a long-term investment, similar to how they hold stocks or bonds. They may wait for the value of cryptocurrencies to appreciate further before deciding to sell or utilize them.
Other governments may choose to actively utilize cryptocurrencies for various purposes. For example, some governments have started accepting cryptocurrencies as a form of payment for taxes, fees, or government services. This can be seen as a way to promote adoption and integration of cryptocurrencies into the mainstream economy. Some governments may also utilize cryptocurrencies for remittances, international trade, or as a means of circumventing traditional banking systems.
However, governments that do not see cryptocurrencies as a viable option or face regulatory challenges may choose to offload their crypto holdings. Governments may sell their cryptocurrencies on public exchanges, private OTC markets, or through auctions. It's important to note that the offloading of cryptocurrencies by governments can impact the market. Large sell-offs of cryptocurrencies by governments or other entities can affect the price and volatility of the market, potentially leading to market disruptions and impacting investor sentiment. For example, the US government holds a significant amount of Bitcoin by seizing operations of Silk Road, the infamous dark web marketplace. The US government currently holds over 1.06% of the circulating Bitcoin supply. Occasionally, the Bitcoin held by the US government is on the move, startling the market with the fear that a liquidation may follow.
The relationship between governments and crypto is complex, with governments making diverse decisions based on their objectives and the evolving landscape of the crypto market. The top holdings of crypto by governments are mostly derived from seized assets. This may change when regulation around trading, usage and holding of crypto is formalized.
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