Bitcoin as a reserve currency
₿itcoin Insights #6
This issue deals with the most discussed Bitcoin topic of the past week. The sale of nearly 50,000 Bitcoin (BTC) — worth up to $3 billion by the Federal Criminal Police (BKA) on behalf of the General Prosecutor’s Office in Dresden (Saxony).
What happened?
Saxon investigators had already seized almost 50,000 BTC in mid-January. These came from the illegal trade in pirated copies of the streaming portal ‘movie2k’. One of the two main suspects, who is in custody, facilitated the voluntary transfer of the Bitcoin. It has not yet been decided who is ultimately entitled to the money. Nevertheless, the Saxon law enforcement authorities, who are responsible for storing the seized Bitcoin, recently sold all the Bitcoin in their possession. They have the option of selling illegally acquired assets of criminals as part of so-called forced sales if there is a risk that they would otherwise lose considerable value. Forced sales are usually used for perishable goods or vehicles. If, for example, a car acquired from illegal means is confiscated and there is a risk that the value of the vehicle could fall significantly in view of lengthy court proceedings, such assets may also be sold during this time — provided certain conditions are met and a court approves this.¹
Who is responsible?
With a quantity of 50,000 Bitcoin worth around $3 billion, political decisions should be made on how to deal with this Bitcoin. If you look at Saxony’s budget for 2023/24, you can see that the total budget for “social affairs and social cohesion” amounted to almost 3 billion euros. It therefore stands to reason that Mr. Kretschmer, as Minister President, could have played a role in this decision. Another possibility would be a decision by Finance Minister Christian Lindner. However, this is very unlikely, as it seems only Saxony is responsible here.
In principle, there should be transparency about the basis on which those Bitcoin are sold. This should be communicated transparently so that it is clear why the BKA is acting in this way on behalf of the Dresden Public Prosecutor General’s Office or Saxony.
What can be criticized about this approach?
- Legal clarification: First of all, it should be legally clarified whether a sale makes sense at all. In the event of a positive verdict for the defendants, repayment in Bitcoin could be necessary. If the price rises by then, the state would have to buy back Bitcoin at a higher price, which would incur avoidable costs.
- Transparency: The actions should be explained transparently and press inquiries should be responded to differently than in this case. The justification that the proceedings are still ongoing and therefore no information can be given is not comprehensible if all Bitcoin is sold at the same time (possibly prematurely).
- Timing: It is crucial to choose the right time to sell in order to avoid negative price effects. Even if there is no perfect time, the timing for selling large amounts of Bitcoin must be chosen carefully. Large amounts of Bitcoin should not be sold on holidays or during other market-affecting events (such as the announced redemption of Mt. Gox’s 142,000 Bitcoin worth approximately $9 billion), as this could put additional pressure on the market. It is important to note here: It is not necessarily the sale that has the biggest impact, but the announcement that a large amount of Bitcoin is about to be sold.
- Selling method: Large amounts should never be transferred or sold in one day. The transfer of such a large quantity indicates that it will soon be sold, as the seller will not leave the Bitcoin on an exchange for long. The same applies to the BKA: “Not your keys, not your coins”, which is why they cleverly transferred the Bitcoin from the exchange back to their own wallet at the end of the day. With ca. 50,000 BTC, the BKA wallet was the 16th largest Bitcoin wallet in the world at the time. In principle, market makers and mainly OTC desks should be used for such sums in order to minimize price collapses. The remaining stock can be sold on large exchanges over a longer period of time if there are not enough buyers via OTC desks. However, it appears that the BKA initially only attempted to sell a large amount of Bitcoin via the three public exchanges Coinbase, Kraken and Bitstamp. It was only after considerable uproar on social media that the Bitcoin were apparently transferred in large quantities from these exchanges back to the BKA wallet and then to OTC traders.
Will Saxony regret the sale?
In short: probably not. Because unfortunately Saxony has not learned from the past. At the end of 2020, they already sold 2,700 Bitcoin. This also involved Bitcoin from the streaming platform movie2k. In the months that followed, the price of Bitcoin rose by over 200 percent.
Bitcoin as a reserve currency
What the BKA sale has shown: Germany needs a bitcoin strategy! There may be further cases in which Bitcoin is confiscated and the events surrounding the BKA sales in Saxony should not be repeated.
My tip for the German government: hold confiscated Bitcoin. Like El Salvador, Germany should focus on a Bitcoin standard and diversify its currencies in order to become less dependent on the US dollar in particular. It is easier for the federal government to hold Bitcoin than to start a process to buy it. Otherwise, Bitcoiners will continue to criticize the federal government via social media with the hashtag #HFSP (Have Fun Staying Poor). In addition, more and more Bitcoin transactions are being received in the BKA wallet with public keys that are readable by humans.
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Philipp J.A. Hartmannsgruber holds a master’s degree in Finance & Accounting. He is a Board Member of the Blockchain Bundesverband (Bundesblock). In 2019 he founded PJAH Consulting, a bitcoin-consultancy.
