Some CryptoCurrency Thoughts

Tulip Bulbs Might Have Value

Yesterday, I was part of a panel on cryptocurrency. The Federalist Society hosted it and unfortunately, we had to do it by Zoom. I was grateful the FedSoc could do what they did to make it happen.

As my fellow panelist and friend James Koutoulas said, “our organizations in the US that stand for civil liberties ought to actively fight for them”.

A lot of interesting things were stated by panelists, but I want to focus on some of Professor John McGinnis thoughts. I took notes while he spoke.

One concern that lawyers have is this. Should they actually worry much about cryptocurrency and topics like regulation? Or, should they stick to their knitting? McGinnis makes the argument that because of the make-up of cryptocurrency, it is on the dividing line of “Liberty←——>State”.

Crypto isn’t just a potential, but it’s also software. It might be a store of value like gold, so it could be a commodity. It might also become something else.

Fiat currency is a creation of the state. Only a government can give value and create public trust. It’s worth noting that the US Confederacy had its own currency. So did Nazi Germany. The Reichsmark was introduced in 1924 as a permanent replacement for the Papiermark. This was necessary due to the 1920s German inflation which had reached its peak in 1923. The European Union caused countries to abandon their currency in favor of a centralized unit of value. Fiat currency isn’t static.

Many current governments holding power have debased their currency. Venezuela and Zimbabwe come to mind but there are plenty of others. It is worth noting that the US dollar has seen a 94% decrease in purchasing power since the Federal Reserve was created in 1913.

Nation-states do manipulate their currency. It’s not just bad actors like China. We have seen governments give money to cronies. Even if they don’t “give money”, they use the power of government through contracts, loans, or regulation to dole out money to favorite people. We have also seen the government use the currency to deny civil liberties to citizens. Even in the US, rules surrounding accredited investors deny many citizens the opportunity to invest in certain enterprises with their own hard-earned money. Another obtuse way the US gives money to certain favored organizations is the Export-Import Bank. Subsidies or tax loopholes are other methods of manipulation. You don’t have to be a totalitarian or nasty dictator to manipulate currency or markets.

Nation-states are beginning to think about creating their own digital currency. I am against a digital US dollar. The government could turn on or turn off your currency based on your political beliefs. If there is anything we have learned in the Covid rancor over vaccines, it’s that the state can utilize its power to try and control citizens. What if it had a digital currency and no paper money?

The prospects of that are frightening.

Cryptocurrency is often discounted because bad actors use it for fraudulent or nefarious activity. The truth is, more black market trade and nefarious activity is conducted in US dollars than any other medium of exchange. When agents raid drug dealers homes, they never find large caches of Brazillian bolivars.

Governments all over the world are very wary of cryptocurrency. They are as wary as teacher’s unions and public school systems are of charter schools, home schools, and private schools. Crypto not only poses a theoretical challenge to fiat currency, but also a physical challenge.

The US legal system cannot shy away from digesting, processing, and figuring out cryptocurrency. The legal system cannot isolate governance of money away from politics. Neither can the US Constitution. One thing we have seen in the Obama, Trump, and Biden administrations is a President who offers a lot of opinions about what the Federal Reserve ought to do. Congressional hearings with Federal Reserve chairs can get contentious. Certainly, the Department of the Treasury has become a highly politicized office. So has the Office of the Comptroller.

Do you know what can isolate governance and control from politics? Cryptocurrency. Governance is not centralized but decentralized. Often, there is a limited amount of currency created by rule. Sure, it can be infinitely divisible, but the gross supply line is fixed.

Cryptocurrency is here to stay in one form or another. It’s still not ready for prime time but there are a lot of things that are being built which could become very compelling.

As countries continue to debase their fiat currency, it opens up a place for crypto to come in and fill the void. There is a reason my friend Gil’s crypto ATMs are popular all over every country south of the United States border in the Western Hemisphere.

My opinion is that Gary Gensler is not the right person to oversee the regulation of crypto. Already, he is saying that cryptocurrencies are securities when they aren’t. He isn’t a believer in decentralized governance and freedom of choice. His track record at the CFTC points to that. But, crypto does need some very loose guard rails for regulation.

I will end with the question McGinnis posed because it is so compelling.

“Will the State objectively regulate cryptocurrencies when cryptocurrency has the ability to topple one of the State’s greatest powers, money creation?”