The auction of bitcoin in particular carries a host of real concerns for U.S. national security and fiscal policy, and the risks may outweigh the reward.

Next week, the U.S. Marshals Service (USMS) plans to auction off over 2,000 seized bitcoin to domestic and foreign private bidders who can afford to pay a $200,000 deposit. On one level the auction should come as no surprise, given longstanding U.S. policy of selling assets seized by law enforcement. But the auction of bitcoin in particular carries a host of real concerns for U.S. national security and fiscal policy. These concerns require close review, and, on balance, I believe they strongly counsel against this sale.

Although the auction will likely bring in some revenue, the risks may outweigh the reward. Here’s why:

First, if Bitcoin continues its historic price growth, then like the now-infamous exchange of 10,000 bitcoin for two pizzas in 2010, the value of thousands of bitcoin at today’s prices could pale in comparison to what they would be worth in the future. Of course, the price of bitcoin could also collapse. But even if it does, the expected revenue from the auction next week is so small that it makes more fiscal sense for the government to bet on the upside, and "hodl" the bitcoin instead.

Second, because the U.S. dollar has served as the world’s dominant reserve currency since WWII, the U.S. economy is particularly vulnerable if central banks sell their reserve dollars for other stores of value, such as bitcoin. The very existence of buyers willing and able to exchange this many dollars for bitcoin may be cause for concern. But also because the auction is open only to wealthy people, including foreign nationals and foreign syndicates of buyers, it creates a risk of providing the U.S.’s geopolitical rivals the opportunity to build reserves of bitcoin, which they could use to hedge against the U.S. dollar, or evade economic sanctions.

This is by no means an endorsement of asset forfeiture—but if government is going to seize bitcoin and other digital assets, it should be careful about how it handles them. The bitcoin auction risks becoming an unnecessary transfer of public assets to already-wealthy investors who can buy in bulk, and may weaken the U.S.’s position against geopolitical rivals who take advantage of the opportunity.

Moreover, the idea of the U.S. government hodling a store of value like bitcoin is not without precedent. Central banks stockpile gold to hedge against future crises, and the U.S. hodls more gold in reserve than any other country in the world. Like gold, bitcoin would be a prudent addition to the U.S. reserve. The U.S. can, in effect, print dollars—but it cannot print gold or bitcoin. Compared to other seized assets like cars, yachts, or houses, storing bitcoin is cheap—all of it could fit on a single piece of paper. Instead of auctioning the bitcoin, the government could laminate that paper, then lock it in Fort Knox with the gold.

1) Auctioning thousands of bitcoin is fiscally unwise, given the small upside and significant downside

On the one hand, there is an upside to selling bitcoin at auction: the government gets money relative to the present value of the bitcoin. Next week’s auction is expected to fetch approximately $20 million. Between this auction and the nearly 4,000 bitcoin the USMS already auctioned in January, 2018 has been a boon for the bitcoin buyers who exchanged millions of dollars for them. But for a federal government with a $4 trillion budget, $20 million is a drop in the bucket—a small return on a bet that bitcoin’s price will fall. But if it continues to grow, selling now would be a huge missed opportunity, since it will be worth far more in the future than it is today. In other words, there is a fundamental asymmetry between the government’s risk and reward.

As Vijay Boyapati recently argued, a decision to hodl bitcoin instead of selling it is an asymmetric bet: the value downside is limited to 1x (downside here is $20 million, if government cancels the auction and Bitcoin’s price falls to $0), but the upside could be 50x or more. For example, if bitcoin does replace gold as the dominant non-sovereign store of value, each of the 21 million total bitcoin would be worth $380,000. That means today’s $20 million of bitcoin would be worth nearly $1 billion—and that’s just if it replaces today’s market for gold. If Bitcoin-backed payments grow to compete with fiat currencies, its potential upside is greater still.

Given such a high potential upside, it is more fiscally responsible to hodl the bitcoin than to sell it now. Bitcoin is up 2,000% over the last two years, and 19,000% over the last five years. Even if the government gives bitcoin just a 5% of ever matching the present value of gold and a 95% chance it falls to $0, then hodling the 2,000 or so bitcoin still produces an expected return approximately twice as profitable as selling it today.

2) Auctioning bitcoin abroad risks strengthening the U.S.'s geopolitical rivals

In addition to the auction’s fiscal downsides, transferring so much bitcoin abroad could also threaten U.S. national security. The auction could facilitate the transfer of bitcoin to nation-states that use it to avoid sanctions, and risks allowing the U.S. to fall further behind its rivals in building bitcoin reserves as a hedge against future global crises.

The rules of next week’s auction plainly state that foreign citizens and syndicates of foreign citizens may participate, so long as they are not listed on the Treasury Department’s list of “Specially Designated Nationals.” This is a list of countries, companies, groups, and individuals facing U.S. sanctions, such as ISIS and the ruling Kim family in North Korea. But because bitcoin can be transferred peer-to-peer without the permission of any bank intermediary, then the minute the USMS transfers the bitcoin to winning bidders, it surrenders control over any subsequent bitcoin transfers.

It is not clear whether the USMS has any measures in place to safeguard against sanction circumvention in bitcoin sales that take place just after the auction. Putting aside the question of whether economic sanctions are good policy, the U.S. national security community has used sanctions as a means to exert pressure on other countries. At the same time, the USMS is selling bitcoin abroad, which can serve as a means to evade the sanctions! It is possible that these different parts of government are not communicating with each other, or have competing priorities. In any event, it is important for them to get on the same page.

Moreover, if trade wars between the U.S. and other countries continue to escalate, then bitcoin could become a means to mitigate reserve depreciation, leading central banks to add bitcoin to their reserves, alongside their gold. If that happens and bitcoin booms, China may be better-suited than the U.S. to reap those gains. China hosts the world’s dominant manufacturer of Bitcoin mining equipment, and although China recently banned Bitcoin production (“mining”) as well as Bitcoin exchanges, as of December 2017 China still accounted for nearly 80% of Bitcoin production.

Just this week, the Trump administration blocked Broadcom's $117 billion hostile takeover bid, on grounds that Chinese dominance in 5G technology would have “substantial negative national security consequences for the United States.” If U.S. national security advisers are concerned about geopolitical rivals gaining dominance in emerging tech, it might be prudent to consider the risks of allowing rivals to dominate bitcoin holdings as well.

In sum, it is unclear whether the auction provides any U.S. national security benefits, but it does create new risks. Like its opposition to Broadcom’s bid, the U.S. national security community could consider weighing in on the merits of this deal, too.

* * *

For a government that can, in effect, print its own money, it is not clear that the expected revenue from next week’s bitcoin auction outweighs the risks, both fiscally and to national security, of offloading this many bitcoin to private buyers.

About four years ago, the U.S. government sold 30,000 BTC to a single buyer for $19 million. Those bitcoin are worth nearly $300 million today. The buyer, venture capitalist Tim Draper, says he’ll never sell his bitcoin back into fiat currency again. Perhaps Draper is drunk on optimism, but even if the chances of mass Bitcoin adoption are remote, it may still be a risk worth hedging. The USMS should consider whether it could better protect the national interest by calling off the auction, and hodling the bitcoin instead.

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Misha holds a J.D. from Yale Law School, where he co-founded the Yale Law and Technology Society (TechSoc). He can be reached on Twitter @MishaGuttentag.

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