(MAR 06, 2025 ) Essay by PAUL KRUGMAN
Title: The “strategic crypto reserve” will be a giant rug pull scam
Look, there’s a lot going on, most of it terrible. Even so, I’m surprised that we’re just starting to get widespread coverage of the biggest theft in world history — at least so far. And as I’ll explain, a related but even bigger theft, promoted by Donald Trump, is in progress as you read this.
Here’s the story: last month hackers looted Ethereum coins worth $1.5 billion from Bybit, a Dubai-based crypto exchange — apparently the most money anyone has ever stolen in a single caper. The FBI believes that the North Korean regime was behind the hack. Most of the coins have already been laundered into Bitcoin, and will eventually be turned into real money that will be used to sustain Kim Jong Un’s brutal dictatorship.
It’s quite a story, yet it has only recently begun to get major coverage. The likeliest explanation of this lag is that crypto-related fraud and theft is so rife that reporters and editors have grown blasé.
But small investors continue to lose large sums in crypto scams, like “rug-pulls.” And the biggest rug-pull yet is underway: Donald Trump’s plan for a “strategic crypto reserve.”
What’s a rug-pull? A textbook example just happened in Argentina, where Javier Milei, the president, touted a new cryptocurrency called $Libra. The currency’s price soared as thousands of small players bought in, while insiders sold their holdings for huge profits. Then the price collapsed, leaving small players owning worthless bits of code.
Does this sound familiar? It should: the $Trump coin, introduced with great fanfare by Trump in January, attracted billions in dollars from MAGA fans, then quickly lost more than 80 percent of its value. The great bulk of $Trump coins were initially bought by a handful of “whales,” large investors, although it’s not clear whether their intent was to scam small buyers or simply to bribe the president.
While both Milei and Donald Trump deny that they personally profited from the rug-pulls they enabled, I seriously doubt that anyone believes them. And if Trump manages to establish a federal “strategic crypto reserve,” paid for by US tax dollars, the scams associated with $Libra and $Trump will look like chump change.
While a “strategic crypto reserve” sounds a lot like the Strategic Petroleum Reserve — a national stockpile of oil to be drawn down in the event of an energy crisis — it would consist of nothing but a hackable string of ones and zeroes on servers. It’s important to understand that although cryptocurrencies have been around for a while — Bitcoin was introduced in 2009 — no one has yet found significant legal uses other than pure speculation. As far as I can tell, actual transactions involving cryptocurrencies almost always involve criminal activity, such as money laundering or paying ransom to extortionists.
Which cryptocurrency do criminals prefer? Most apparently use Tether, a “stablecoin” whose value is kept fixed in U.S. dollars. Tether is able to do this because it holds a stock of U.S. Treasury bills with Cantor Fitzgerald, an investment bank that has itself invested in Tether. Cantor’s former CEO, Howard Lutnick, is now Donald Trump’s secretary of Commerce.
Some people say that the crypto industry has undue influence with the Trump administration. I wonder why?
But back to the strategic crypto reserve: What would the U.S. government do with this reserve? Make payoffs to gangsters? Buy favors from rogue governments like North Korea? I guess it could, in a pinch, sell the stuff to raise money if people have lost trust in the U.S. government’s solvency, but surely it would be a better strategy to stay solvent — among other things by not borrowing to buy assets that will probably crash in value if and when America tries try to sell them.
So what’s this about? I think this is best seen as one kind of rug pull, a hack pump-and-dump.
In a traditional pump and dump, shady investors buy an obscure stock, then drive its price up with false rumors while quietly selling off their holdings. In the “hack” version, the gang hacks into computers at brokerage houses, getting them to buy the target stock without investors’ knowledge — although some individual investors may also be sucked in by the rising price. Again, the perpetrators sell out before the crash.
In the case of the strategic crypto reserve, scammers haven’t hacked into computers. Instead, they’ve hacked into the Trump Administration, inducing the president and those around him to announce a plan to use US tax revenue to buy huge amounts of cryptocurrencies with no discernible strategic value. The mere announcement of the plan drove up crypto prices, which plunged after Trump imposed tariffs on Canada and Mexico.
If the crypto strategic reserve does happen, the price of crypto will skyrocket. Then, if history is any guide, insiders will sell out. Apparently, at least one speculator, perhaps betting that Trump will have a hard time actually raising the money to buy all that crypto, has already made huge profits by shorting Ethereum. Why should we put our taxpayer dollars into such an extremely volatile entity? Why are we funding a mega-casino where small investors are sure to lose?
It’s true that cryptocurrencies have proved to be remarkably durable even though their only serious uses seem to be in enabling criminal activity. Yet experience shows that the most likely outcome of a strategic crypto reserve is that it will go the way of $Libra and $Trump — yielding huge profits for a few big players and huge losses for both taxpayers and low-information investors.
Does Trump know that he’s participating in a giant pump-and-dump that will benefit insiders while effectively stealing small investors’ savings? I have no idea, but there’s no reason to believe that it would bother him if he did know.
For it’s more obvious every day that we now have government of, by and for crooks.