Earlier this year, it was starting to look like the crypto industry would never catch a break. In March, a federal judge let the Securities and Exchange Commission proceed with a lawsuit alleging that Coinbase, the nation’s largest crypto exchange, has 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 crypto firm. The following month, Changpeng Zhao, founder and former CEO of Binance, the largest crypto platform on earth, was sent to prison for four months after pleading guilty to money laundering charges. Meantime, federal prosecutors indicted the founders of Samourai Wallet, a crypto privacy service, claiming that they (like Zhao) failed to take adequate steps to prevent money laundering.
The SEC’s enforcement action against Coinbase—along with parallel suits against Binance and a third major platform, Kraken—threatens to derail the crypto industry’s development. If the agency gets its way, exchanges will be forced to comply with securities disclosure, custody, and licensing rules. Applied to crypto, many of these obligations are confused (purchasers of crypto tokens don’t need disclosures on an issuer’s financial condition to make informed decisions, for instance). Some are nearly incomprehensible (practical custody of a crypto token differs fundamentally from legal custody of a security). A few are downright paradoxical (how are exchanges supposed to convince the issuers of cryptocurrencies, some of whom are quite deliberately anonymous, to step forward and cooperate with a hostile SEC?). For the SEC, this mismatch between crypto markets and New Deal-era regulations is a feature, not a bug. Putting the industry in an impossible bind is the point.
But the crypto industry’s string of bad news finally snapped in May, when the House passed legislation (the Financial Innovation and Technology for the 21st Century Act) that would provide the industry much-needed clarity, not to mention legitimacy. Under the bill, an entity could issue a digital currency while complying with a set of crypto-tailored disclosure rules. Exchanges could later facilitate trading of that currency subject to comparatively light regulation by the Commodity Futures Trading Commission. You can tell this arrangement makes sense because SEC Chairman Gary Gensler, the architect of his agency’s anti-crypto campaign, publicly announced that he hates it.
The crypto industry is attractive to speculators and swindlers. Oversight is needed if digital currencies are to become mainstream financial instruments. At present, though, regulators are approaching the industry with alarm and animus. Emboldened by the FTX debacle, the government has been working hard to scare traditional banks from engaging with crypto firms. Critics have dubbed this “Operation Choke Point 2.0,” in a nod to how the Obama administration pressured banks to cut ties with politically disfavored actors such as gun stores and payday lenders.
No one disdains crypto more than Massachusetts senator Elizabeth Warren, who boasts of leading an “anti-crypto army.” She wants to bar banks and crypto exchanges from fulfilling transactions with unidentified counterparties, such as owners of “unhosted” crypto wallets. (The major crypto exchanges already adhere to “know your customer” rules for their own clients.) To burnish her hardline stance, she tries to sound like a national-security hawk, expressing her concern “about anyone in Congress who is not worried about the threat posed by Iran and North Korea and their use of crypto.” This is nonsense. Warren is not scared of foreigners. She just wants to control Americans.
For crypto’s opponents, the natural end goal seems to be the imposition of a centralized digital currency controlled by the state. Private digital currencies can be designed or adjusted to cloak transactions in anonymity; government digital currency does the opposite, enabling the state to surveil transactions—as well as to block transactions, remove money from accounts, or shut individuals out of 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 to the prospect as well. Most proponents want only a “wholesale” CBDC for interbank transfers. The idea is to create new efficiencies in the banking sector, thereby protecting the dollar’s status as the global reserve currency. But the risks outweigh the potential benefits. A wholesale CBDC, once introduced, could transmogrify into a “retail” CBDC, then into a mandatory retail CBDC, then into a mandatory retail CBDC that the government surveils and throttles. Conversely, the efficiency gains of a wholesale CBDC could be obtained using one of the existing private stablecoins (digital currencies pegged to the U.S. dollar or some other reference). And in any event, a push to preserve the dollar’s reserve status should start not with heady proposals about a CBDC, but with a sober effort to tackle the nation’s spiraling debt load. If the government debases the dollar, a CBDC will be beside the point.
The virtues of private crypto and the perils of state crypto are two sides of the same coin (as it were). Republicans, in their recently released party platform, pledge to end the “crypto crackdown” and to oppose the creation of a CBDC. They vow 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. (One crypto advocacy group gives President Joe Biden a “D” rating.) The divide reflects how Republicans increasingly view themselves as countercultural dissidents—outcasts in danger of being de-banked—while Democrats have by degrees become the party of institutional elites and authority. But this is a complex and still inchoate realignment. Some Democrats are coming to realize that bashing crypto doesn’t get them much. Some Republicans persist in seeing the crypto crackdown as a matter of law and order (much as the first Trump administration did). The politics of crypto could easily shift.
Regardless of what happens in Washington, crypto will remain a bulwark against authoritarianism. The Chinese Communist Party banned digital currencies (except its own), yet its people conduct many billions of dollars in crypto transactions a year. Bolstered by virtual private networks, the Tor browser, PGP encryption, and decentralized exchanges, crypto will continue to serve as a check on any attempt to construct a surveillance state or social-credit system.
With a $2.5 trillion market cap, cryptocurrencies are here to stay. It is in America’s interest, both as an economic power and as a country that values freedom, to embrace this reality. We should cast fear aside; the SEC’s war on the exchanges (and “Operation Choke Point 2.0”) should end. Our legislators should lay down sensible ground rules. We should assert preeminence over the global crypto network—to the extent that anyone can.
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