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Keep encryption free | City Journal
At the start of this year, it seemed like the cryptocurrency industry would never get a break. In March, a federal judge allowed the Securities and Exchange Commission to proceed with a lawsuit alleging that Coinbase, the nation’s largest cryptocurrency exchange, had been operating as an unregistered securities broker. The next day, Sam Bankman-Fried received a 25-year prison sentence for stealing billions of dollars from customers of FTX, his now-defunct cryptocurrency company. The following month, Changpeng Zhao, the founder and former CEO of Binance, the world’s largest cryptocurrency exchange, was sent to prison for four months after pleading guilty to money laundering charges. Meanwhile, federal prosecutors indicted the founders of Samourai Wallet, a cryptocurrency privacy service, alleging that they (like Zhao) failed to take adequate measures to prevent money laundering.
The SEC’s enforcement action against Coinbase, along with parallel lawsuits against Binance and a third major platform, Kraken, threatens to derail the development of the cryptocurrency industry. If the agency gets its way, exchanges will be forced to comply with securities disclosure, custody, and licensing rules. As they apply to cryptocurrencies, many of these requirements are confusing (buyers of crypto tokens don’t need disclosures about an issuer’s financial condition to make informed decisions, for example). Some are nearly incomprehensible (the practical custody of a crypto token is fundamentally different from the legal custody of a security). Some are downright paradoxical (how are exchanges supposed to convince crypto issuers, some of which are deliberately anonymous, to step forward and cooperate with a hostile SEC?). For the SEC, this disconnect between cryptocurrency markets and New Deal-era regulations is a feature, not a bug. The point is to put the industry in an impossible situation.
But the streak of bad news for the cryptocurrency industry finally ended in May, when the House passed a bill (the Financial Innovation and Technology for the 21st Century Act) that would provide the industry was in dire need of clarity, not to mention legitimacy. Under the bill, an entity could issue a digital currency that complies with a set of disclosure rules tailored to cryptocurrencies. Exchanges could then facilitate trading in that currency subject to relatively light regulation by the Commodity Futures Trading Commission. This provision arguably makes sense because SEC Chairman Gary Gensler, the architect of his agency’s anti-crypto campaign, publicly announced who hates him.
The cryptocurrency industry is attractive to speculators and scammers. Oversight is needed if digital currencies are to become mainstream financial instruments. At the moment, however, regulators are approaching the industry with alarm and animosity. Emboldened by the FTX fiasco, the government has been hard at work scare traditional banks from engaging with cryptocurrency firms. Critics they nicknamed this “Operation Choke Point 2.0,” a nod to how the Obama administration pressured banks to cut ties with politically disfavored players like gun shops and short-term lending institutions.
No one disdains cryptocurrencies more than Massachusetts Senator Elizabeth Warren, who to brag to lead an “anti-crypto army”. She wants to prevent banks and cryptocurrency exchanges from transacting with unidentified counterparties, such as owners of “unhosted” cryptocurrency wallets. (Major cryptocurrency exchanges already adhere to “know your customer” rules for their customers.) To hammer home her hardline position, she try to play like a national security hawk, expressing her concern “for anyone in Congress who is not concerned about the threat posed by Iran and North Korea and their use of cryptocurrency.” This is nonsense. Warren is not afraid of foreigners. She just wants to control Americans.
For cryptocurrency opponents, the natural end goal seems to be the imposition of a centralized, state-controlled digital currency. Private digital currencies can be designed OR fixed up to cloak transactions in anonymity; government digital currency does the opposite, allowing the state to monitor transactions, as well as block them, remove money from accounts, or exclude individuals from the banking system altogether.
Needless to say, Warren supports the creation of a central bank digital currency (CBDC). Surprisingly, some Republicans, including former House Speaker Paul Ryan, have warmed up to the prospect as well as. Most proponents only want a “wholesale” CBDC for interbank transfers. The idea is to create new efficiencies in the banking sector, thereby protecting the dollar’s status as a global reserve currency. But the risks outweigh the potential benefits. Once introduced, a wholesale CBDC, could transmogrify into a “retail” CBDC, then into a mandatory retail CBDC, then into a mandatory retail CBDC that the government monitors and limits. In contrast, the efficiency gains of a wholesale CBDC could to be obtained using one of the existing private stablecoins (digital currencies pegged to the U.S. dollar or some other reference). And in any case, a push to preserve the dollar’s reserve status should begin not with heady proposals for a CBDC, but with a sober effort to address the nation’s growing debt load. If the government devalue the dollara CBDC would not be the right thing.
The virtues of private cryptocurrencies and the dangers of state-run cryptocurrencies are two sides of the same coin (so to speak). Republicans, in their recently released party platform, pledge to end the “crypto crackdown” and oppose the creation of a CBDC. They promise to defend citizens’ “right” to “mine Bitcoin” and “transact free from government surveillance and control.” Led by the likes of Gensler and Warren, Democrats tend to take an extreme position on the other side of the issue. (A cryptocurrency advocacy group from President Joe Biden has a “D” rating.) The split reflects how Republicans increasingly see themselves as countercultural dissidents, outsiders at risk of being de-banked, while Democrats have gradually become the party of institutional elites and authority. But this is a complex and still nascent realignment. Some Democrats they are coming to realize that criticizing cryptocurrencies doesn’t earn him much. Some Republicans persist in seeing the crackdown on cryptocurrencies as a matter of law and order (very like the first (The Trump administration has done so.) Cryptocurrency policy could easily change.
Regardless of what happens in Washington, cryptocurrencies will remain a bulwark against authoritarianism. The Chinese Communist Party has banned digital currencies (except its own), yet its people conduct many billions of dollars in crypto transactions per year. Strengthened by virtual private networks, the Tor browser, PGP encryption, and decentralized exchanges, cryptocurrencies will continue to act as a check on any attempt to build a surveillance state or social credit system.
With a market cap of $2.5 trillion, cryptocurrencies are here to stay. It is in America’s best interest, both as an economic powerhouse and as a country that values freedom, to embrace this reality. We should put fear aside; the SEC’s war on exchanges (and “Operation Choke Point 2.0”) should end. Our legislators should establish sensible ground rules. We should assert preeminence over the global crypto network, to the extent that anyone can.
Photo by Chris McGrath/Getty Images
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