What will happen to the encryption industry if Trump fires Powell?

Author: Aaron Brogan, CoinTelegraph; Translated by: Tao Zhu, Jinse Finance

In recent months, a certain pattern of fluctuations has emerged: U.S. President Donald Trump will take some actions that are objectively harmful to the U.S. economy, and the market will collapse. Seeing this situation, Trump turns to Federal Reserve Chairman Jerome Powell, asking him to lower the federal funds rate—the interest rate at which the Federal Reserve lends to banks. The resolute Powell would say, "No."

Trump hopes to lower interest rates because doing so can effectively inject cash into the U.S. economy, stimulate economic activity, and boost the markets. He believes this will make him appear successful. Powell wants to follow strict economic standards to set interest rates, carefully balancing the dual mandate of maximizing employment and maintaining stable prices for the Federal Reserve.

He also hopes to maintain the independence of the Federal Reserve from political pressure, and it is crucial to keep the Federal Reserve independent from political pressure. If the market believes that the independence of the U.S. central bank has been compromised, then selling U.S. Treasury bonds (U.S. sovereign debt) may become more difficult. Fundamentally, this is a problem because the U.S. will have to pay more money to borrow, thereby making it poorer – but this issue is particularly acute now, as the U.S. is already burdened with a massive $30 trillion debt that must be refinanced regularly.

If the market is forced to refinance at higher interest rates due to a loss of trust in the U.S. government, the cost of interest will absorb a larger proportion of funds in GDP, and as the kids say, America will be completely destroyed.

Last week, Trump repeatedly hinted that he wanted to fire Powell, and the market was not happy about it. On Monday, Trump referred to Powell as a "big loser" on the "Truth Social" program, causing an uproar. According to reports, in response, Treasury Secretary Scott Bessent ( expressed concerns to Trump about the risks of firing Powell, while Trump now seems to have tacitly approved of this action and stated on Tuesday that he would not fire the Federal Reserve chairman.

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Trump and Powell in 2017. Source: Loyalty

Nevertheless, the process feels more like a spiral, with many market observers waiting for the next event to unfold. This raises a question: What would happen if Trump really acted on his instincts and fired Powell? Specifically, what impact would this have on the cryptocurrency industry?

Crack the Federal Reserve

It is worth mentioning that the president should not be able to dismiss the chairman of the Federal Reserve at will. The Federal Reserve Act of 1913, Section 10, states that "each member's term shall last for fourteen years from the expiration of the term of his predecessor, unless the president removes him for cause."

This wording may seem ambiguous, but in the case of "Humphrey's Executor v. United States" in 1935, the Supreme Court ruled that the Constitution does not grant the president "unlimited removal power," therefore the president's removal power is subject to the limitations of statutory language.

The decision approved the concept of "independent agencies" that are part of the executive branch but possess independent powers. While many agencies have this characteristic, including the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Trade Commission, the Federal Reserve is the most significant.

Economists are not particularly concerned about the political control of central banks. Politicians have relatively short-term motivations, considering issues in terms of years or election cycles. This essentially leads them to favor short-term policies, and hot money inflows are the purest form of this. However, fiscal and monetary policy is a subtle art that often leads to painful policy choices.

A typical example is Richard Nixon pressuring then-Federal Reserve Chairman Arthur Burns to implement an expansionary monetary policy on the eve of the 1972 election, believing it would help improve his chances of re-election. Nixon won that election by a landslide, but shortly thereafter, the disastrous "stagflation" emerged, which paralyzed the U.S. economy for a decade, and the effects of that still resonate in the industries that were hollowed out during that period.

In stark contrast to this was Paul Volcker's policy, which implemented a series of drastic interest rate hikes from 1979 to 1987 after a disastrous period of stagflation, leading to the "Volcker Shock," a series of painful recessions. However, the effects of this policy ultimately suppressed inflation and heralded the economic boom of the 1990s, contributing to Bill Clinton's outstanding fiscal policies.

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No politician can make such a choice, and no such choice will be made in the future, and that is the problem. Economists — and, crucially, the market — firmly believe that the Federal Reserve must remain independent, or the entire economic structure of American society could collapse. This is no exaggeration — countries where central banks are politically controlled, such as Weimar Republic Germany, Peronist Argentina, and Venezuela, have experienced extremely severe hyperinflation, leading to geopolitical regression over generations, people starving and eating rats, and even the rise of Adolf Hitler. This is a serious matter.

To dismiss Powell, Trump must first overturn the precedent set by the Humphrey's Executor case. Given the current composition of the Supreme Court, many legal scholars believe this is likely to happen. This is a Rubicon; once crossed, there is no turning back. Not only Trump, but every subsequent president will have the full legal authority to direct all executive officials— including the Chairman of the Federal Reserve—according to their own wishes. Most people believe this will lead to disaster.

But whether a disaster occurs or not, this will be a test for cryptocurrency. The original Bitcoin white paper aimed to strip financial transactions away from "financial institutions as trusted third parties." If the Federal Reserve collapses and U.S. monetary policy deviates from rational judgment, the early arguments for cryptocurrency will become very apparent.

Due to the capital flight triggered by Trump in recent weeks, investors are seeking safety in various assets. Traditionally, whenever a crisis occurs, savvy investors shift risk assets into U.S. Treasury bonds. These are considered risk-free assets. Well, those days may be over. During the peak of the tariff crisis, the yield on ten-year bonds was close to 5%, and it has not fully retreated to previous lows. If Trump undermines the Federal Reserve, this outflow of funds will be just a drop in the ocean, and this money may flow into cryptocurrencies.

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Trump warned Powell that he is referred to here as "Mr. Too Late."

Historically, the price of Bitcoin has closely followed the NASDAQ (albeit with a multiplier). However, since the tariff crisis, Bitcoin has miraculously begun to rise, despite the fact that US securities prices have remained largely depressed. This has led some to speculate that we are witnessing a long-prophesied "decoupling" in which crypto assets will fulfill their original purpose and be independent of centralized assets. **

We cannot say for sure if this will happen, but if Trump fires Powell, we will know for certain.

Just out of the frying pan and into the fire

Of course, a historically significant collapse in the world is not entirely good for cryptocurrencies, and this crisis will bring tremendous suffering in various aspects. First, stablecoins will almost immediately feel the terrible consequences.

Over the past decade, two dollar-denominated stablecoins—USDC and Tether's USDt—have dominated the market. Their issuers, Circle and Tether, are both significant systemic entities and major buyers of U.S. Treasury bonds, with most of their stablecoin liabilities backed by U.S. Treasury securities.

The direct consequence of the Federal Reserve crisis may be a default by the Treasury. Economist Noah Smith speculates that Trump may attempt to write down the U.S. sovereign debt:

"I suspect Trump will take actions more similar to what he did as a businessman regarding debt issues—seeking cheap bailouts, and if that fails, declaring bankruptcy."

In fact, the president himself hinted at this prospect, stating in February of this year that they might take measures to pretend to lower the price of cash:

"There may be a problem—I'm sure you've read articles about U.S. Treasury bonds, which could be an interesting issue. […] Many things might not count at all. In other words, some of the things we've discovered are highly fraudulent, and thus our debt may be less than we think."

Sovereign defaults will immediately impact Circle and Tether, leading to a decline in the value of their collateral. This, in turn, could result in under-collateralization of stablecoins, potentially triggering a bank run. The market may eventually stabilize, but the events can easily reverse, causing major stablecoins to collapse.

This will create many second-order effects, as the smart contracts used as collateral will begin to liquidate positions and spread throughout the market.

Interestingly, the political costs of these consequences may not be as severe as those of the Federal Reserve crisis, because government bonds are not the only systemically important assets for cryptocurrencies. For many years, the dollar has been the world's reserve currency. There are many good reasons for this: it is relatively strong and stable, making it suitable for trade. However, if the government supporting it is no longer strong and stable, this pattern may change.

As more and more transactions are conducted through accounts denominated in euros or renminbi, regulatory authorities in the EU and China will have greater control over the flow of fiat currencies conducted through cryptocurrencies. A well-known cryptocurrency lawyer, who chose to remain anonymous due to concerns about political retaliation, speculated on this matter:

I believe that China will fill most of the gaps, while the EU will fill the remaining majority. China and the EU over-regulate in different ways for different goals, which is detrimental to the cryptocurrency industry as a whole. This seems very bad.

This may prompt people to turn to unsecured crypto native assets, but there is basically no precedent showing that such assets are widely used for real-world transactions. The stablecoin crisis is likely to severely impact the industry in the coming years as it gets back on track.

In the end, no one knows whether Trump will fire Powell or if he can fire Powell. No one knows what consequences his decision will bring. But if a butterfly flapping its wings in Argentina can trigger a tornado in Prague, then Donald Trump's musings in the White House could forever prove the validity of blockchain or undermine its stability.