Interpretation of the Texas Bitcoin Reserve Act: The first to be implemented, with a $10 million allocation and the use of derivatives

Author: Weilin, PANews

Texas Governor Greg Abbott recently signed SB 21, making Texas the third state in the U.S. to pass legislation to establish a state-level strategic Bitcoin reserve. Although Arizona and New Hampshire took the lead in the bill, Texas is the first state to establish an independent, publicly funded Bitcoin reserve fund, rather than just authorizing it.

The Texas government has allocated $10 million to purchase Bitcoin in the current fiscal biennium (i.e., two-year budget). This fund will be managed by the Texas Comptroller and will be set up outside the state fiscal system rather than being included in the traditional state fiscal system.

At the same time, Governor Greg Abbott also signed HB 4488, which ensures that the Bitcoin reserve fund is legally immune from the state's periodic "fund-sweep" mechanism, that is, it will not be diverted for general fiscal purposes. The bill also stipulates that the legal status of the reserve fund will continue to exist even if no Bitcoin is purchased by next summer.

Contents of SB21: From procurement to custody standards, how are Bitcoin reserves implemented?

The SB21 bill believes that Bitcoin and other cryptocurrencies have strategic potential to enhance Texas' fiscal resilience. They can be used as a tool to combat inflation and economic fluctuations. Establishing a strategic Bitcoin reserve has the public interest of enhancing the financial security of residents of the state.

According to the bill, the Texas Strategic Bitcoin Reserve is established as a special fund outside the state treasury, which is managed, administered and operated by the Comptroller. The reserve includes: funds transferred or deposited by legislative appropriations; income allocated to the reserve under general laws; Bitcoin and other cryptocurrencies purchased or acquired by the reserve based on asset market value requirements (including cryptocurrencies and airdrops derived from blockchain forks); investment income, interest or rewards generated by reserve assets.

The Act provides that:

• Flexible use of assets : The Comptroller General may invest, exchange, sell, manage or hold assets in accordance with the standards of a reasonable and prudent investor, in the context of the purpose, terms, and distribution requirements of the current reserve. The legislature may appropriate funds for investment in cryptocurrencies and management of the reserve. The Comptroller General may use Bitcoin or other cryptocurrencies in the reserve, or the net proceeds from their sale, to pay reasonable management expenses.
• Reserve funds can be invested together with state fiscal funding pools.
• The Comptroller General may not transfer reserve funds to the State treasury unless authorized by the General Appropriations Act or other law.
• Investable assets: Bitcoin or other cryptocurrencies purchased with reserve funds, with an average market value of no less than $500 billion in the past 24 months. (Currently only Bitcoin meets the criteria)

At the implementation level, the Comptroller may contract with one or more third-party entities, including: a qualified custodian with cold wallet secure custody technology; and a qualified liquidity provider to assist in the purchase and management of assets.

However, qualified liquidity providers must ensure that they: have a federal or state law license; audited financial statements issued by a regulatory auditing agency; have at least five years of experience in crypto asset trading; have an office in Texas and register a principal; and certify to the Comptroller that they meet the above conditions.

In addition, the bill proposes that the Comptroller General may use derivatives if it is beneficial to reserves. SB21 stipulates a five-member Strategic Bitcoin Reserve Advisory Committee, which is composed of the Comptroller General and one investment expert designated by him and three crypto asset experts, responsible for asset valuation recommendations and investment policy design.

From precious metals to Bitcoin: Exploring financial sovereignty under policy continuity

In an X Space, Congressman Giovanni Capriglione, who helped draft the bill, said that in his view, the right of the public to own, hold and use any medium of exchange that they mutually agree on is unquestionable. "Whether it's cash, coins or precious metals like gold and silver, this is true. About eight years ago, I helped promote and pass the bill that established the first state-level precious metal depository in the United States, the Texas Bullion Depository, which currently holds gold and silver.

“I’ve been following the Bitcoin space since I purchased my first Bitcoin about a decade ago, primarily because of its ability to empower individuals to take control of their own finances without federal regulatory interference,” he said.

When asked, many Bitcoin supporters also recognize the value of gold. How does he view the relationship between Bitcoin and precious metals? He said that the strategic Bitcoin reserve is not intended to compete with our gold custody vault. They are complementary in function. They can both provide a scarce, valuable resource that can be transferred between individuals, and are both effective means to fight inflation.

Bitcoin Strategic Reserve "Local Laboratory", Custodian Agency to Open Bidding

In response to Trump's federal policy on Bitcoin strategic reserves, various BTC reserve bills at the U.S. state level are spreading and being reviewed intensively. On June 25, Arizona passed the "Bitcoin Reserve" bill HB2324. The bill establishes a reserve fund to confiscate assets obtained through criminal asset forfeiture. If signed by Governor Hobbs, this will be the second reserve bill passed in the state.

Texas Congressman Giovanni mentioned above said that the White House has issued an executive order on the strategic reserve of Bitcoin, but the state government seems to be ahead. As a state legislator who has served for 13 years, he believes that the state government should take the lead. The federal system of the United States allows states to become "policy laboratories" to test new policies more quickly and closer to public opinion. According to him, from the beginning of the year to now, Congress has only passed about 18 laws, while Texas has passed about 1,200 during the same period. Local efficiency is obviously higher and the response is faster.

Zack Shapiro, a lawyer at the Bitcoin Policy Institute, said that they have conducted in-depth research on the definition, role and necessity of the "Strategic Bitcoin Reserve (SBR)". Compared with the federal government, the states have more financial constraints: the federal government can issue treasury bonds, own the global reserve currency, the US dollar, and print money, but the states do not have these powers. However, the states also bear long-term responsibilities such as pensions and infrastructure, but have to bear the pressure of currency depreciation. Therefore, the core meaning of SBR is to preserve the value of public funds, fight inflation, and ensure that state governments can fulfill their obligations in the future.

In addition, he believes that the fiscal structures of various states vary greatly. Some states have huge investment accounts, while others hope to integrate Bitcoin into existing investment portfolios or try more cutting-edge financial instruments, such as "Bitcoin Municipal Bonds (BitBonds)", which can even provide investors with tax-free Bitcoin income space.

“A few years ago, I discussed with legislators how to include Bitcoin in the Texas balance sheet. Initially, we wanted to use a charitable trust with the state comptroller as the beneficiary, but this was still politically difficult. Then in November last year, the political environment changed, Bitcoin had become more mature, and it received strong support from Governor Greg Abbott, the Lieutenant Governor, and the Speaker of the House of Representatives. The bill was finally submitted and underwent some modifications during the process. ”

He added that the $10 million expenditure by Texas only accounts for 0.00004% of the annual budget of Texas, which is quite small and can be regarded as a "testing the waters". The most important thing now is to ensure that the Office of the Comptroller and the Texas Treasury Trust Company (TTSTC) have sufficient capabilities to work with qualified custodians to ensure the safe custody of reserves, compliance audits and other processes.

Lee Bratcher, chairman of the Texas Blockchain Committee, also added, “We hold monthly meetings with companies interested in responding to the Texas Treasury Trust Agency RFP (Service Procurement Letter of Intent). TTSTC is a private entity close to the Office of the Comptroller General. We are helping these crypto companies establish connections with it, showcase their products and services, and will conduct an open and transparent bidding process in the future. The bill authorizes the Comptroller General to use derivatives to gain exposure to Bitcoin. We hope that they will not simply buy ETFs, but directly custody physical Bitcoin and control private keys.”

According to him, the SB21 bill sets detailed conditions for "liquidity providers", such as being headquartered in Texas and operating for more than 5 years, but the definition of "qualified custodians" is more flexible, probably to expand the scope of competition. Institutions such as Coinbase, Fidelity, Anchorage, Unchained, Onramp, etc. all have different custody solutions. The Office of the Comptroller General and TTSTC will need a certain learning process to evaluate various solutions.