Tag Crypto

New bipartisan crypto bill would “create a federal regulatory framework.” Sens. Cynthia Lummis (R–Wyo.) and Kirsten Gillibrand (D–N.Y.) have introduced a proposal to regulate cryptocurrency, called the “Responsible Financial Innovation Act.” It’s a reintroduction of a bill proposed last year, with some new sections added.

“This bill is a whopping 274 pages and covers most of the waterfront of crypto, from securities and commodities regulations to taxation of crypto, broad interagency coordination, and regulation of ‘payment stablecoins,'” noted Justin Slaughter, policy director at the tech investment firm Paradigm.

The likelihood of this bill passing is low, predicted Slaughter. But it could be important for “how it influences the House’s McHenry Thompson bill,” which does have a chance of passing. The latter bill is slated for a markup later this month. (See Slaughter’s Twitter thread for explainers of key parts of the Senate bill that might make it into the House measure; see a discussion draft of the House bill here.)

One key part of the bill attempts to clarify when crypto assets are securities and when they are commodities. In so doing, it “undercuts the SEC through classifying most of the fintech industry as commodities overseen by the Commodity Futures Trading Commission (CFTC),” noted journalist Matt Laslo. And this, he suggested, could be a good thing:

In the wake of crypto collapses, the SEC has used ambiguities in current law—coupled with congressional inaction—to amass sweeping new regulatory powers. Congress wants that power back; well, at least some of the most vocal, angry and well-versed crypto-concerned lawmakers in Washington.

“I think the SEC has been trying to regulate through enforcement, and that’s typically very unwise,” Gillibrand tells me.

In this sense, the congressional crypto regulation could be the lesser of evils. More from Laslo:

Even as industry leaders, investors and their congressional allies accuse the SEC of crippling crypto, what’s become clear in recent months is, if Congress fails to act, again, securities regulators will aggressively go it alone….

Like other federal agencies, senators Lummis and Gillibrand gave SEC officials seats at their re-drafting table—asking for input, running revisions by the regulators and even accepting some of the agency’s recommendations.

“They have seen it. We asked them to tweak it, and we’ve incorporated some of their changes,” Lummis told me for WIRED.

After taking the SEC’s concerns seriously over the past year, the senators have been left astounded-to-angered watching the heavy regulatory hand of the SEC clamp down on the likes of Coinbase and Kraken, et.

“The Binance thing I understand, because it is offshore,” Lummis says. “But the domestic industries really are trying to comply for the most part and they’re just getting the cold shoulder, and that’s not how we regulate in this country. You know, they’re not the enemy.”

You can find the full Lummis-Gillibrand bill here.

It seems to set up reams of regulatory hoops for digital currencies and assets and their exchanges to jump through. For instance, it requires a bunch of new mandatory disclosures to consumers. And “each year, the chief executive officer of a crypto asset intermediary shall, under penalty of perjury, certify compliance” with these consumer disclosures, as well as “applicable anti-money laundering, customer identification, prevention of terrorist financing, and sanctions laws,” and more, the bill’s text states.

“So if a company says it’s disclosing certain consumer protection information & then doesn’t do that, the CEO can be criminally charged with perjury,” notes Slaughter.

Theoretically, this is meant to deal with the Sam Bankman-Frieds of the world. But it seems like the sort of intervention that could ensnare people for simple oversights, too.

Some of the bill’s provisions certainly could have positive and protective effects for consumers. Or they could be time- and resource-wasting bureaucratic nonsense that would, at worse, give the government more leeway to play gotcha with crypto businesses and invade the privacy of crypto users. The new bill just dropped, so we’re still in the period of puzzling out what it will really mean for the crypto industry.

One red flag: The bill would change the Federal Deposit Insurance Act to make money-laundering offenses involving crypto assets punishable by up to five years in prison—which could have a big effect, considering how broad some money laundering statutes reach.

The bill’s establishment of an interagency law enforcement working group to combat illicit crypto use also seems ripe for inviting government snooping and overreach.

In other sections, the Lummis-Gillibrand bill includes tax provisions, some good and some bad. “Token sales with a gain below $200 aren’t taxed,” notes Slaughter. And “trading crypto counts as capital gains income, not regular income, just like in commodities/securities.”

“One major criticism from the [crypto] community…was the fact that the Act intends to uphold the Howey test,” notes FXStreet. “The test is used to determine whether a transaction qualifies as an investment contract in the US which in turn labels the assets involved in the process as Securities….This test has been criticized by many for being outdated and is also the subject of controversy in the ongoing SEC vs. Ripple lawsuit.”

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FREE MINDS

Steep drop in confidence in higher education. A new Gallup poll finds a sharp drop in Americans’ confidence in higher education. In the most recent poll, conducted in June, just 36 percent of those surveyed said they had “quite a lot” or “a great deal” of confidence in higher education, down from 48 percent in 2018 and 57 percent in 2015.

In the most recent poll, 40 percent of those surveyed had “some” confidence in higher education, while 22 percent said they had “very little” confidence. In 2018, just 15 percent of folks surveyed had very little confidence and, in 2015, just 9 percent said the same.

Confidence has dropped across the board, “but Republicans’ sank the most—20 points to 19%, the lowest of any group,” notes Gallup. “Confidence among adults without a college degree and those aged 55 and older dropped nearly as much as Republicans’ since 2018.”

The drop is part of a larger disillusionment with U.S. institutions. Gallup’s June poll “also found confidence in 16 other institutions has been waning in recent years. Many of these entities, which are tracked more often than higher education, are now also at or near their lowest points in confidence,” Gallup points out. And, “although diminished, higher education ranks fourth in confidence among the 17 institutions measured.”

Institutions with the highest confidence rankings were small business (65 percent), the military (60 percent), and the police (43 percent). People had the least confidence in television news (14 percent), big business (14 percent), and Congress (8 percent).

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FREE MARKETS

What The Bear can teach us about dynamism and “the regulatory nightmare of opening a restaurant.” Hulu TV series The Bear centers on a talented chef named Carmy Berzatto who returns home to Chicago after his brother’s* death to help save his family’s flailing sandwich shop. It’s also a testament to dynamism and “the regulatory nightmare of opening a restaurant,” Scott Lincicome writes. Owning a restaurant is challenging in many ways, but “the industry brings many benefits for those willing to put in the work—and, importantly, regardless of their background.”

That mobility’s owed in part to the industry’s common prioritization of results over credentials – for restaurants and their staff. A nice (expensive) degree from culinary school can open some doors and hone some skills, but the real litmus test is talent, experience, and dedication (just ask these famous chefs). And, while starting and even median compensation often isn’t great, excellence pays off: Top performers—waiters, bartenders, chefs, etc.—can make surprisingly good money, even if they never went to college or end up on TV or a shiny cookbook cover.

Having some family in the biz, I’ve seen this all firsthand: a head waiter who started as a Spanish-only busboy, an award-winning sommelier who dropped out of college and learned wine while waiting tables at a suburban bar & grill, an owner who started as a host, and multiple food trucks that have become packed brick-and-mortar establishments. The work (and the livin’) was hard, and plenty of folks burned out, but for those who could hack it—even ones with sordid pasts or messy presents—the rewards were solid.

The Bear nails this dynamic.

It also nails how “public policy can make success even harder,” notes Lincicome:

Of everything standing in our heroes’ way—the menu, the construction, the staff, the personal stuff—it’s the government that’s their biggest and most omnipresent threat. The crew estimates (optimistically) that just “permits, the inspections, and the licenses” will cost them $10,000, but the bigger cost is time: In seemingly every scene inside the restaurant, their actual work is interrupted by a deflating mention of some new bureaucratic hurdle.

More here.

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QUICK HITS

• “Inflation fell to its lowest annual rate in more than two years during June,” reports CNBC, “the product both of some deceleration in costs and easy comparisons against a time when price increases were running at a more than 40-year high.”

• The Federal Trade Commission is appealing a judge’s order denying the agency’s request for it to block Microsoft’s acquisition of Activision Blizzard.

• Planned Parenthood and the American Civil Liberties Union of Iowa are suing over Iowa’s new fetal heartbeat bill. “By banning the vast majority of abortions in Iowa, the Act unlawfully violates the rights of Petitioners, their medical providers and other staff, and their patients under the Iowa Constitution and would severely jeopardize their health, safety, and welfare,” states their complaint.

• Meta doesn’t want Threads to be the new Twitter. “If Meta executives have their way, Threads will not be where people turn to debate policy issues, or catch up on local political developments and learn about breaking news that could affect their lives,” reports NPR.

• “In April, Idaho lawmakers passed legislation requiring any person under 18 to get permission from a parent or guardian before traveling out of state to get an abortion,” notes The Guardian. A new lawsuit claims this statute is unconstitutional.

• Get your politics out of my pickleball, writes Reason‘s Jason Russell.

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*CORRECTION: This post previously misstated which The Bear character had died.

At the end of March, a long-lasting and prominent cryptocurrency exchange, Bittrex, announced it would no longer do business with U.S. citizens because “it’s just not economically viable for us to continue to operate in the current U.S. regulatory and economic environment.”

Then on Monday, the Securities and Exchange Commission (SEC) hit Bittrex with a lawsuit in U.S. District Court in the Western District of Washington.

Among the charges: “Bittrex has been operating as an unregistered broker (including by soliciting potential investors, handling customer funds and assets, and charging a fee for these services) and an unregistered clearing agency (including by holding its customers’ assets in Bittrex-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant customer accounts).

The company has “operated the Bittrex Platform as an unregistered exchange by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders,” the SEC asserts. In doing so, Bittrex has met the demonstrated market needs of thousands of Americans, some of whom, given the rise in some crypto asset values in the past half-decade, have undoubtedly changed their lives enormously for the better.

Bittrex is accused of clearly knowing they might run afoul of the SEC, with the suit citing “Bittrex’s coordinated campaign, going back to 2017, to direct issuers of crypto assets to ‘scrub’ their public statements of any language that could raise questions from the SEC as to whether these crypto assets were offered and sold as securities, while allowing those securities to be traded on its platform….Bittrex knew what statements to ask issuers to ‘scrub’ because it understood the test to determine whether a crypto asset was being offered and sold as a security.”

The SEC wants Bittrex to stop violating the various securities laws it insists it has been breaking, and to “disgorge on a joint and several basis all ill-gotten gains,” with interest.

SEC Chair Gary Gensler has long mocked people in the virtual currency business who complain of lack of regulatory clarity and how the agency practices what many in the field see as arbitrary “regulation through enforcement,” occasionally hitting some market player for some version of dealing in unregistered securities. These have included XRP/Ripple (the subject of a long-ongoing lawsuit), LBRY, Beaxy, Kraken, and Gemini.

The twists and turns and reasonings of how and when one is dealing with a “security” can seem quite opaque. To attempt a simplistic understanding, one needs to go back to the 1946 Supreme Court case SEC v. W.J. Howey.

As explained in an earlier Reason article on the SEC’s threats against leading U.S. market crypto exchange Coinbase:

Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a “security” under the reigning “Howey test” … continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.

A December 2022 article published at the Social Science Research Network, “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are not Securities,” makes a similar argument. The authors, lawyers with a firm called DLx specializing in the blockchain space, insist that while “capital raising from investors, whether involving sales of crypto assets or anything else of value, is incontrovertibly subject to the protections provided by U.S. securities laws….Expanding the reach of federal securities law to characterize fungible crypto assets as securities is both unnecessary and misguided” once the virtual currencies are out in the market being bought, sold, and held by entities with no relation to any original issuers to whom they could be said to be in a common enterprise expecting profit based on the effort of others.

Gensler thinks it’s simple: with bitcoin an exception (roughly, since it never involved any single entity raising money from the public), and ether maybe as well, pretty much every other virtual currency is to him a security; anyone dealing in them without registering with his agency is a criminal. And he will, maybe, probably, eventually, get around to tossing you against the wall. This week it’s Bittrex’s turn. The suit against them lists several virtual currencies Bittrex facilitated trading in that the agency asserts are securities, including Dash, Algo, and NCC.

Just yesterday, before the House Financial Services Committee, as the Wall Street Journal reported, Gensler again repeated that “I’ve never seen a field that is so noncompliant with laws written by Congress and confirmed over and over again by the courts….It’s not a matter of lack of clarity,” insisting crypto market players should understand “that they are providing exchange services, broker-dealer services, clearing services of crypto security tokens.”

Kristin Smith of the Blockchain Association told the committee in a statement that “Gensler’s testimony perfectly reflects the SEC’s approach to the crypto economy: confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country.”

Gensler’s SEC also this week announced it believed most decentralized finance (DeFi) platforms using virtual currencies and contracts should also be considered “exchanges” regulatable by them. SEC Commissioner Hester Peirce, far softer on crypto than Gensler, said, as Coindesk reported, that the SEC’s new scheme regarding DeFi “‘articulates confusing and unworkable standards.’ Noting last year’s destruction of so much of the centralized crypto industry, she added that ‘it seems perverse to me that we would be encouraging centralization.'”

Gensler has been known to suggest it’s a mystery to him why exchanges don’t just step right up and register with the SEC, implying that the legal fact they must is obvious and that doing so is straightforward and easy.

It is, for one thing, remarkably complicated and expensive, though surely Gensler would think that isn’t his problem. But as a detailed essay published by crypto investment firm Paradigm explains, the crypto business has qualities that pre-21st century dealers in items that the SEC might consider securities do not:

[Gensler’s] suggestion that crypto companies can register by “filling out a form online” fails for a … straightforward reason: until the SEC adapts the registration framework to the unique aspects of digital assets, it is impossible to “come in and register.” The current registration forms rely on a set of disclosures that are inadequate for crypto’s unique aspects and leave investors vulnerable. Registration also entails a host of additional regulations for the token, the reporting company, and other participants in the ecosystem that makes the functioning of most crypto protocols impossible.

Indeed, the reason there are virtually no registered token offerings in the US is because the SEC has failed to provide any  actionable guidance, issue a single rule or constructively engage with anyone in the crypto industry to provide a workable regulatory framework for security tokens.

In another essay from Paradigm explaining exactly how complicated both in application and later functioning it is to simply register with the SEC, for token issuers or exchanges, it is pointed out “tokens that register as securities would not be tradeable on existing crypto exchanges, none of which are registered as a national securities exchange. But there are also no registered national securities exchanges that can trade tokens. … But more fundamentally, the current regulations are incompatible with disintermediated trading.” Paradigm gives historical case studies about how tokens that have tried to play ball with the SEC all signed their own death warrants by doing so.

Gensler likely thinks the incompatibility of crypto markets—or the very existence of virtual currency—and existing securities law is appropriate, that in fact none of them should exist.

Some in the crypto space see a set of government actions lately, including the SEC’s recent muscle-flexing against exchanges, the closing amid various varieties of government pressure of two banks that were big deals in the crypto space, Silvergate and Signature, denying crypto bank Custodia out of Wyoming membership in the Federal Reserve system, and many other pressures on banks that deal with crypto, as constituting a clear and present conspiracy to just squeeze the entire industry out of existence. Some are calling the situation “Chokepoint 2.0” after last decade’s “Operation Chokepoint” aimed at harming various state-disfavored businesses from porn to guns.

Coinbase’s CEO Brian Armstrong said this week that bugging out from U.S. jurisdiction is a possibility for his company as well. Many in the crypto-watching space seem resigned that, at least under this administration, the U.S. government actively wants almost no virtual currency business to occur under its jurisdiction or involving its citizens.

Coinbase, which is by trade volume the largest cryptocurrency exchange in the United States, announced yesterday it had been hit by the Securities and Exchange Commission (SEC) with a threat of looming legal action.

As a public Form 8-K filed by Coinbase with the SEC explained, “On March 22, 2023, Coinbase…received a ‘Wells Notice’ from the Staff…of the Securities and Exchange Commission….stating that the Staff has advised the Company that it made a ‘preliminary determination’ to recommend that the SEC file an enforcement action against the Company alleging violations of the federal securities laws.”

In that 8-K filing, which is required to inform the public about important events that might affect shareholders, Coinbase explained that, based on what SEC staff have communicated to them, “these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet. The potential civil action may seek injunctive relief, disgorgement, and civil penalties.” (The news is indeed affecting stockholders, with Coinbase’s stock down roughly 13 percent today as of this article’s publication.)

Coinbase Chief Legal Officer Paul Grewal went public with a lot of the frustration that has hit market participants in crypto (and even federal bankruptcy judges) as they try to navigate the SEC’s approach to virtual currencies. Grewal explained how the SEC under chair Gary Gensler has been reshaping regulatory law and policy via enforcement (and the occasional vague public threat).

Grewal echoed the complaints many have had while trying to understand exactly why and when the SEC believes that a cryptocurrency is a security and able to be regulated as such, and thus that companies facilitating trading in them face certain registration requirements. “We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” Grewal wrote.

“We continue to think rulemaking and legislation are better tools for defining the law for our industry than enforcement actions,” Grewal went on to say. He again echoed a long-term frustration with the SEC’s apparent desire to reveal what it believes the law requires not through rigorous understandable written notice—something more like actual law or rule making—but by just bashing certain crypto market players against the wall, seemingly at random.

Grewal defended Coinbase’s efforts in trying to understand the law and follow it. In the course of the investigation that led to this week’s notice, “the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register.”

Grewal said that after trying to get the SEC to give feedback on various registration models that Coinbase proposed, the agency generally stonewalled, was unresponsive, and eventually in January just “told us they would be shifting back to an enforcement investigation.” Coinbase insisted “our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company,” he wrote. “Our core business model remains the same.”

Grewal noted that different federal agencies have given conflicting reports on the way to legally categorize certain virtual currencies: “The Chair of the CFTC [Commodity Futures Trading Commission] recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that ‘the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.’ Current SEC Chair recently opined that perhaps BTC [bitcoin] is the only digital asset commodity, which is entirely at odds with the position of the CFTC.”

“If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed,” Grewal concluded. “Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules.”

Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a “security” under the reigning “Howey test,” based on the 1946 Supreme Court case SEC v. W.J. Howey Co, continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.

Grewal insisted that nothing on his exchange should qualify as a security, including the staking services that he said the SEC has been familiar with since 2019. “Until this investigation, we had heard no concerns at all from the SEC about” them, he explained.

Grewal believes, as do many in the crypto space who have been watching with dismay as the SEC’s wrecking ball swings unpredictably, that SEC actions like this “will only drive innovation, jobs, and the entire industry overseas.”

The Securities and Exchange Commission (SEC) charged Kraken—America’s third-largest cryptocurrency exchange by volume—with offering an unregistered security last Thursday. As part of a settlement, Kraken agreed to immediately cease offering interest-bearing “staking” services to U.S.-based customers and pay a $30 million fine.

But one SEC commissioner, Hester M. Peirce, published a forceful dissent, calling the SEC’s action “paternalistic and lazy” and questioning “whether SEC registration would have been possible” given the murky framework the agency offers.

Join Peirce and Reason‘s Nick Gillespie and Zach Weissmueller for a live discussion of the regulatory threats to cryptocurrency this Thursday at 1 p.m. ET. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.

This week’s The Reason Livestream is produced by Adam Sullivan.

Show notes:

SEC press release on Kraken enforcement action  

SEC Commissioner Hester Peirce’s dissent 

CNBC: “SEC commissioner Peirce publicly rebukes her agency, Gensler on crypto regulation.”  

SEC Commissioner Gary Gensler on crypto staking

CNBC: “SEC’s Gary Gensler on Kraken staking settlement: Other crypto platforms should take note of this“

Kraken CEO Jesse Powell responds to SEC head Gary Gensler 

FTX Meltdown and the Future of Crypto. Live With Kraken’s Jesse Powell 

“Operation Choke Point 2.0 is Underway, and Crypto is in its Crosshairs,” by Nic Carter in Pirate Wires

Coin Desk: “SEC Proposal Could Bar Investment Advisers From Keeping Assets at Crypto Firms”

The Block: Total value locked into DeFi projects

Beyond politically connected scammers and frothy valuations, the attractiveness of cryptocurrencies lies in their potential for doing what cash does, but across distances. When governments inflate money, people turn to other stores of value, including crypto. When politicians and their financial-sector accomplices block transactions of which they disapprove, people look for alternative means of doing deals without permission, crypto among them. So, when officials talk of stripping privacy and autonomy from cryptocurrencies such as bitcoin, you know they would do the same to cash if they could.

“Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism,” Sen. Elizabeth Warren (D–Mass.) huffed this week. “The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions. The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security.”

The bipartisan bill to which Warren refers sports the tendentious moniker, Digital Asset Anti-Money Laundering Act of 2022. Stripped of grandiose claims, it attempts to extend the financial surveillance state cooked up by drug warriors and anti-terrorism fearmongers to cryptocurrencies. Warren and company picked an opportune moment to do just that, while the public is occupied with a headline-grabbing financial scandal that taints crypto’s already sketchy reputation.

In fact, Sam Bankman-Fried’s shenanigans at FTX, perhaps concealed by generous political donations, look old-school, including mingling personal and corporate funds in ways that would have raised red flags long before digital tokens. But they cast further shade over a crypto sector that had yet to gain acceptance by the American mainstream. After years of breathy warnings that cryptocurrency is shady, and speculative values detached from reality, many people are prepared to believe the worst.

“Crypto is an interesting technology that had one terrible piece of bad luck: its standard-bearer, bitcoin, went up in value 10,000x over a few years,” wide-ranging commentator Scott Alexander wrote earlier this month. “When something goes up in value 10,000x, it’s hard to think of it in any other context. Whatever it was before, now it’s ‘that thing which went up in value 10,000x’.”

Alexander points out that, despite the shellacking the crypto sector is taking in the press and from politicians, it remains popular in countries where it’s used for its intended purpose as a store of value and a means of exchange in defiance of authoritarian controls. “Vietnam uses crypto because it’s terrible at banks,” he notes. “There’s a history of the government forcing banks to make terrible loans, and then those banks collapsing.” In socialist Venezuela, “cryptocurrency provides a hard-to-ban alternative which has caught on among Venezuelan hustlers and small businessmen.”

This played out in Turkey when the government got serious about turning the lira into toilet paper and people bought gold, foreign currency, and bitcoin. Bitcoin also became a means for Canadian protesters to work around government attempts to financially isolate their protest movement.

“Of course a technology centered around avoiding governance and banking failures will be centered in the countries with the most governance and banking failures!” Alexander adds.

But any technology that can be used by good people can also be used by bad people. That’s as true of window curtains as it is of crypto (or cash). The same privacy sought by a family going through evening routines might serve a terrorist building bombs, just as businesses and activists evading a hostile state might use the same currency that purchases bomb parts. Politicians love playing up potential abuses.

“Following the September 11, 2001 terrorist attacks, our government enacted meaningful reforms that helped the banks cut off bad actors’ from America’s financial system. Applying these similar policies to cryptocurrency exchanges will prevent digital assets from being abused to finance illegal activities without limiting law-abiding American citizens’ access,” insists Sen. Roger Marshall (R–Kan.), co-sponsor of the Digital Asset Anti-Money Laundering Act of 2022.

When politicians hold up the post-9/11 panic that supercharged the surveillance state as their model, take them seriously. The legacy of that time is widely recognized as an over-powerful government that intrudes into Americans’ lives, subjecting our activities and communications to monitoring and diminishing our liberty. With their bill, Warren, Marshall, and company want to extend that surveillance to financial technology that was explicitly developed to empower individual liberty and privacy.

“The bill first seeks to classify self‐​hosted wallets as money service businesses,” cautions the Cato Institute’s Nicholas Anthony. “For those unfamiliar, self‐​hosted wallets are merely the digital equivalent of a wallet in your pocket or purse. … Where much of the financial surveillance in the United States depends on what’s known as the third‐​party doctrine, self‐​hosted wallets offer individuals protection from government surveillance and censorship. Yet Senator Warren’s bill would put an end to that protection.”

The bill, says Anthony, would “classify cryptocurrency miners, validators, and network participants as money service businesses.” It “also sets its sights on cryptocurrency mixers” who “offer individuals the opportunity to enhance their privacy when using cryptocurrencies on public blockchains.”

In fact, the bill’s language specifies that “the Secretary of the Treasury shall promulgate a rule that prohibits financial institutions from … handling, using, or transacting business with digital asset mixers, privacy coins, and other anonymity-enhancing technologies.”

Senators Warren and Marshall talk about “terrorism” and “drug lords,” but their clear goal (whether or not its within their reach, which is another matter) is to strip crypto of its ability to be used privately and without permission in the same way we use cash. Their objections to digital money also apply to banknotes and coins. Ultimately, it’s not crypto they fear, but our liberty to earn, purchase, save, and donate without being impoverished, scrutinized, or stopped by government officials.

Bitcoin and other digital tokens have their flaws, but they’re an attempt to fulfill a widespread desire for reliable stores of value and means of exchange independent of control. And while all such forms of money are vulnerable to fraud and theft, that’s already illegal. The Digital Asset Anti-Money Laundering Act of 2022 doesn’t even attempt to address such crimes, instead, it’s an attack on financial privacy and liberty. For all the reasons politicians are coming after crypto, you can bet that cash is next.

On January 15, 2022, the Canadian government closed its borders to unvaccinated American truckers and began requiring domestic truckers to show proof of COVID vaccination when crossing northward, infuriating drivers and snarling North American trade. Within two weeks, thousands of “Freedom Convoy” protesters filled the capital city of Ottawa, demanding the requirement be lifted. Officials responded by branding them “extremists,” even “terrorists,” and quickly began treating them as such. On February 4, the Canadian government pressured the crowdsourcing service GoFundMe—the truckers’ seemingly decentralized source of financing—into abruptly stopping further transfers.

Ottawa was just getting started. On February 14, the federal government invoked the Emergencies Act, which let it freeze any bank account or legal financial instrument that could be traced to the truckers. So convoy supporters turned to bitcoin, the decentralized, peer-to-peer, blockchain-enabled digital currency whose whole raison d’etre—maintaining a separation between currency and government—seemed designed for moments like this.

Or not. Most bitcoin transactions—75 percent, according to an October 2021 working paper published by the National Bureau of Economic Research—are conducted through cryptocurrency exchanges. These, being legally licensed businesses (at least in theory), are vulnerable to the same interference as old-school financial institutions. The Canadian government demanded that the exchanges block all crypto wallets that could be linked to the protesters, and it initially seized the contents of some outright. “We will be forced to comply,” tweeted Jesse Powell, then-CEO of major crypto exchange Kraken. “If you’re worried about it, don’t keep your funds with any centralized/regulated custodian. We cannot protect you. Get your coins/cash out and only trade p2p.”

States around the world are chipping away at the freedom-enhancing qualities of the purportedly permissionless virtual currencies that have proliferated since the pseudonymous Satoshi Nakamoto unleashed bitcoin in January 2009. Governments are cracking down on third-party exchanges, seeking to hoover up all transaction data to enforce tax and other laws; they are trying to classify virtual currencies as “securities” in order to tighten the regulatory grip; they are sometimes banning software and digital addresses used to transfer ownership of them. Most ominously of all, some governments are trying to get into the crypto business themselves.

War on Crypto Anonymity

By the end of 2021, according to the industry tracking service Chainalysis, global adoption of crypto had “grown by over 2300% since Q3 2019 and over 881% in the last year.” Institutional investors in 2021 traded $1.14 trillion worth of cryptocurrencies on the leading exchange Coinbase alone. Digital currency commercials so dominated the 2022 Super Bowl that advertising insiders dubbed it the “Crypto Bowl.” And while the market capitalization of the crypto space plummeted to $957 billion as of early October 2022, down from a $2.8 trillion high in November 2021, that’s still nearly triple the value at the start of October 2020.

The industry has grown too big for governments to ignore. In August 2022, the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) made it a crime for any American to receive or send money using digital addresses associated with Tornado Cash, a crypto “tumbling” service that pools both source-identifiable and fully anonymous cryptocurrency together in order to make it harder to forensically trace ownership of particular virtual currency from sender to eventual recipient. Tornado Cash, the government claimed, had illegally laundered more than $7 billion, some of it stolen.

In response, pranksters began sending tiny bits of the digital currency ether to many prominent figures via Tornado Cash addresses, to hit home the absurdity of treating the mere interaction with a service as a crime. (The U.S. Treasury did trouble itself to say it would not go after mere recipients of Tornado-tainted ether.)

This wasn’t the first time OFAC had made interacting with such a tumbler illegal for Americans, but Tornado Cash’s distinct nature raises unique questions about the government’s claimed power over increasingly sophisticated crypto markets and the sometimes autonomous software that such markets have come to use.

While some tumblers are essentially custodial entities with actual human beings controlling the exchange of digital currency tokens, Tornado Cash uses “smart contracts,” a form of self-executing code. This kind of decentralized finance (DeFi) usually involves ethereum (the second-largest cryptocurrency per market capitalization), which was designed to enable the development of decentralized apps on top of a blockchain. Some of the addresses that OFAC sanctioned were code, untethered to individual people.

Because of this architecture, explain Jerry Brito and Peter Van Valkenburgh in an August 2022 paper for the crypto-focused think tank Coin Center, the people who created the “Tornado Cash Entity” have “zero control over the [Tornado Cash] Application today” and “can’t choose whether the Tornado Cash Application engages in mixing or not, and…can’t choose which ‘customers’ to take and which to reject.” This implies that there is no actual individual who should be legitimately punishable for whatever specific crimes the app might be thought to have facilitated.

Potential First Amendment implications arise from the difference between a human provider and a blockchain-enabled piece of software. If OFAC can bar citizens from using “an ever expanding list of specific open source protocols and applications that are ‘blocked,'” Brito and Van Valkenburgh ask, “then isn’t that a restriction on the publication of speech?”

“Merely blocking one application is not the intent,” the Coin Center authors argue. “The intent is to send a message that any example of this software is to be avoided…to chill speech such that Americans not only avoid interacting with these specific contract addresses, but avoid interacting with any protocol that is substantially similar to the code in those addresses. It’s a ban not just on a specific application, but on a class of technology.”

This interpretation is supported by an unnamed Treasury official, who told the Financial Times in August 2022 that the department “believe[s] this action will send a really critical message to the private sector about the risks associated with mixers writ large” and that the crackdown was “designed to inhibit Tornado Cash or any sort of reconstituted versions of it to continue to operate.” In September 2022, Coinbase bankrolled a legal challenge to the Tornado Cash ban.

Governments are trying to steer cryptocurrency transactions into legally regulated entities with human operators that can be more easily controlled. In May 2021, Marathon Digital Holdings, which at the time used 6 percent of the total worldwide computing power applied to bitcoin “mining” (the computerized process for creating new units of the currency), began accepting only transactions arising from OFAC’s list of legally approved entities. But what state pressure can accomplish, market pressure can still reverse—just a month later, after a backlash from customers allergic to state meddling, Marathon began dealing with all comers again.

States could, and might yet, use the carrot of regulatory permissiveness or even subsidy to encourage miners to accept blocks only from registered nonanonymous users, destroying crypto’s core attributes of pseudonymity and permissionlessness. (Though governments should remember that mining is a highly movable operation. Restrictions or outright bans just ensure that citizens of other countries are the ones benefiting from it.) The flood of Wall Street money that helped make many initial crypto holders rich brought with it the attendant danger of respectability—the more “legitimate” an industry becomes, the less liberatory it can be.

White Papers, Red Tape

Governments’ reactions to cryptocurrencies have varied widely. El Salvador made bitcoin legal tender in September 2021 (though survey data in mid-2022 indicate that most citizens and businesses are still not using or accepting it), while many other countries ban bitcoin mining and/or the use of crypto as payment. Regulations commonly focus on intermediary businesses that offer custodial, trading, or other services, with the goal of gathering up as much information as possible about their customers.

These efforts, operating under the rubric of AML/CFT (for “anti–money laundering/combating financing of terrorism”), are central to officials’ worries about crypto: They cannot tolerate spaces where people can exchange value without the police accessing every detail. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) considers even private peer-to-peer buyers and sellers of crypto as licensable money service businesses, with all the requirements and criminal/civil penalties pertaining thereto.

A G-7 body called the Financial Action Task Force wants to unify every nation’s regulations to ensure no crypto-asset company on the planet evades governments’ prying eyes. But as of June 2022, the group was lamenting that the “vast majority of jurisdictions have not yet fully implemented” its demands to standardize the market in an enforcement-friendly way. The global regulators griped that so far “only 11 jurisdictions have started enforcement and supervisory measures” for what they call the “travel rule,” which requires the private sector to obtain and report “originator and beneficiary information,” as they put it—meaning, squeal on all their customers to financial authorities.

In the U.S., the President’s Working Group on Financial Markets (PWG) was already regretting the lack of international standardization in November 2021. “Illicit actors can exploit these gaps by using services in countries with weak regulatory and supervisory regimes to launder funds, store proceeds of crime, or evade sanctions,” a PWG report lamented.

The past couple of years have seen a proliferation of blandly repetitive white papers and statements from governments and international bodies and financial institutions about the promises and perils of virtual currencies. Such cud chewing gives hints, though never total clarity, about where state interference in crypto markets might be heading.

In March 2022, President Joe Biden issued an executive order instructing various federal agencies to come up with policies, protocols, and regulations for cryptocurrencies. The specifics remained hazy under clotted bureaucratic prose about “encourag[ing] regulators to ensure sufficient oversight and safeguard against any systemic financial risks,” demanding “coordinated action across all relevant U.S. Government agencies to mitigate these risks,” and working “across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies.”

More concretely, the administration slipped into 2021’s Infrastructure Investment and Jobs Act a provision that widens legal reporting requirements for dealing in crypto on behalf of other people. Entities that receive more than $10,000 of value in crypto now must collect and report to the government the name, date of birth, and Social Security number of the person they got it from.

This fresh demand is already the object of a lawsuit from Coin Center, which argues the requirement constitutes “a mass surveillance regime on ordinary Americans” in violation of the Fourth Amendment, and that it would often be impossible to satisfy given the way blockchain interactions work. As Coin Center explains on its website, the government is trying to sidestep Fourth Amendment obstacles to financial and telecom snooping via the “third party” exemption—maintaining that users lose their protections against unreasonable search and seizure the moment they volunteer sensitive info to a financial institution or telecom company. But there is no third party in peer-to-peer transactions, just sender and receiver. “If the government wants us to report directly about ourselves and the people with whom we transact,” Coin Center argues, “it should prove before a judge that it has reasonable suspicion warranting a search of our private papers.”

In autumn 2022 the fruits of Biden’s March order began to fall in the form, generally, of more vague white papers. The Treasury Department in September released a 56-page report recommending that “regulatory and law enforcement authorities should, as appropriate, pursue vigilant monitoring of the crypto-asset sector for unlawful activity, aggressively pursue investigations, and bring civil and criminal actions to enforce applicable laws with a particular focus on consumer, investor, and market protection.” It also said “regulatory agencies should use their existing authorities to issue supervisory guidance and rules, as needed, to address current and emerging risks in crypto-asset products and services for consumers, investors, and businesses.” In other words, the agency says the government should enforce the law and tell us how the relevant laws apply to behavior in crypto markets; no great revelations for an industry fearing the next regulatory or enforcement shoe that might drop.

More threateningly, the Justice Department that same month announced the launch of a new Digital Asset Coordinator Network—”over 150 designated federal prosecutors from U.S. Attorneys’ Offices”—and suggested, given how hard it was to investigate crypto crimes, that the relevant statutes of limitation be doubled from five to 10 years.

Insecurity About Securities Law

Much of the regulatory chatter and action in crypto over the past few years has been not in the bitcoin or ether tokens that have delivered wild speculative profits to people who got in at the right times, but rather in “stablecoins”: digital currencies pegged to assets such as commodities, government currencies, or algorithmically adjusted baskets of other cryptocurrencies. People use stablecoins as an easier-than-cash means to buy crypto or to invest in or use DeFi projects.

In October 2021, the market cap of the more prominent stablecoins equaled $127 billion—a 500 percent year-to-year rise. DeFi’s ability to move value and make investment decisions via automatic, unregulated programming makes it harder for the government to rely on the old system whereby it drafts financial intermediators such as banks and brokers to spy on their customers.

“Stablecoins could well fuel the coming Internet phase known colloquially as Web3. As smart contracts automate back-end management functions, ordinary citizens will benefit,” attorney Paul Jossey enthused in a July 2022 paper for the Competitive Enterprise Institute. “In the future, cars will rent themselves, computers will lend their excess storage, and decentralized applications will share videos via predefined criteria—stablecoins will enable these and countless other and currently unimaginable transactions.”

Even before the May 2022 collapse of the prominent algorithmic stablecoin Luna, much of the recent regulatory attention in crypto has focused on these widely used tokens. In October 2019, the G-7 warned that stablecoins could “increase vulnerabilities in the broader financial system through several channels.” These channels include damaging banks’ market share and exacerbating “bank runs in times when confidence in one or more banks erodes.” By giving people more choice in where to store their value, stablecoins could also result in “diluting the effectiveness of the interest rate channel of monetary policy.” Any escape from state money and state eyes is seen as too threatening to bear.

In its November 2021 PWG report, the Biden administration flatly recommended the end of stablecoins as we’ve known them, insisting that Congress “should require stablecoin issuers to be insured depository institutions” and impose federal risk-management standards on all custodial wallet providers.

There is no shortage of federal financial laws standing at the ready to ensnare stablecoins in their web—the Glass-Steagall Act, the Electronic Fund Transfer Act, the Dodd-Frank Act, the Bank Secrecy Act, and the Gramm-Leach-Bliley Act, for starters. Federal agencies rubbing their hands in anticipation of ruling the crypto domain include the Department of Justice, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) as well as OFAC. Even the Federal Deposit Insurance Corporation has been advising banks not to deal with crypto.

FinCEN considers stablecoins “convertible virtual currencies,” and the companies that administer them are thus required in the agency’s eye to register as legal money transmitting businesses. This would put them on the hook for complying with anti–money laundering programs, reporting when their clients engage in transactions larger than $10,000, and filing “suspicious activity reports” about actions the government wants custodians to consider suspicious.

But there’s still a gap between the written regulatory letter of the law and the lived-in experiences of existing crypto. As the PWG explained, “there may be some instances where U.S. sanctions compliance requirements (i.e., rejecting transactions) could be difficult to comply with under blockchain protocols.”

With so much potential enforcement hung up on how the new innovations of crypto can or should be crammed into pre–21st century regulatory definitions, various bills to provide definitional certainty are working their way through Congress. One bipartisan bill co-sponsored by Sens. Cynthia Lummis (R–Wyo.) and Kirsten Gillibrand (D–N.Y.) would define digital assets as commodities and therefore put them under the regulatory purview of the CFTC (which most in the field find more congenial than the SEC), unless they were being sold to raise capital for a company, in which case they would count as securities and the SEC would compel disclosure and provide oversight.

Sen. Pat Toomey (R–Penn.) has introduced a bill that would require stablecoins to publicly disclose their backing and redemption policies while otherwise sparing them from the SEC, and another to eliminate taxation on bitcoin transactions (or capital gains appreciations) of less than $50 in value.

Toomey, who did not run for reelection and thus will be out of the Senate in January, sees potential bipartisan support for rationalizing the regulatory structure around crypto in order to encourage more innovation and more U.S.-based development. But the banking industry “leans a little against this whole space; they see it as potentially disruptive to their business model,” Toomey says, though “I don’t feel like they have been mounting a very aggressive and systematic campaign” against it.

The Toomey and Lummis/Gillibrand bills will almost certainly not pass this session of Congress, so it’s still up to the courts to decide a question being hashed out across several lawsuits and enforcement actions: Do most cryptocurrency instruments legally qualify as “securities” and therefore require SEC supervision? The most prominent SEC case wrangling with that question is aimed at a token called XRP, issued by a company called Ripple.

The SEC asserts that XRP was sold in a manner indicating the company “promise[d] to undertake significant entrepreneurial and managerial efforts, including to create a liquid market for XRP, which would in turn increase demand for XRP and therefore its price.” The SEC believes that is sufficient to classify the product as an illegally unregistered “security.”

Ripple insists that the XRP tokens, marked on a decentralized cryptographic ledger, have been used by millions of people who never had any dealings with the company itself, and thus the parties could not be said to be in a common enterprise, a key definitional consideration flowing from the 1946 Supreme Court case SEC v. W.J. Howey Co.

If the SEC wins the Ripple case, all sorts of crypto tokens will also see themselves as obligated to operate under the SEC’s complicated and expensive rules or risk prosecution.

SEC Chair Gary Gensler is prepared to claim full power over crypto. In May 2022, he griped to the House Appropriations Committee that he needed more money and staff to effectively police virtual currencies, insisting the SEC is “really out-personed” at the moment. In September 2022, Gensler scared the crypto world by telling The Wall Street Journal he thinks ethereum should be treated as a security, meaning every buyer and seller should be hemmed in by, and potentially prosecuted for violating, decades’ worth of federal securities regulations.

Central Bank Coin?

As governments struggle to come to grips with the profusion of private electronic currencies, they are increasingly beginning to wonder: If we can’t beat ’em, why not join ’em? A brave new world of central bank digital currencies (CBDCs) lurks around the corner.

Among the countries that have either launched or announced their intentions to launch a CBDC are China, Russia, Uruguay, Ecuador, India, Jamaica, Ukraine, Sweden, South Korea, the United Arab Emirates, Venezuela, the Bahamas, and the eight nations affiliated with the Eastern Caribbean Central Bank. With the alarming amount of knowledge about and power over every transaction that a CBDC could deliver, those dedicated to crypto’s liberating promises might wish the state kept on just trying to beat them instead.

A February 2021 paper from JPMorgan Chase found that about “60% of central banks are experimenting with digital currencies, while 14% are moving forward with development and pilot programs.” The bank foresees a tangle of future jurisdictional issues, “as policymakers will call for harmonization of legal and regulatory frameworks governing data use, consumer protection, digital identity and other policy issues.”

Or, as Federal Reserve Chair Jerome Powell testified to Congress in July 2021, “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you had a digital U.S. currency.”

Deploying a CBDC as a stablecoin killer makes sense from the government’s perspective. As the economist Noah Smith noted in his newsletter in December 2021, “rather than the current environment of unchecked inflation and competitive devaluation, the [DeFi] matrix imposes a new kind of discipline on national currencies, as billions of people make individual choices regarding which currencies to hold—or not hold.” States are not comfortable with us choosing to abandon sovereign currencies.

The Fed insists it has no intention of actually replacing cash, but merely wants to improve the speed and efficiency of our overall payments system—banking the unbanked; making the transfer of value easier, faster, cheaper, and so forth.

“The Federal Reserve’s initial analysis,” the central bank insisted in a January 2022 report, “suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.”

That last point is the danger zone. To use cash, you merely have to convince your counterparty that the cash is cash; you do not have to convince them you are you. In a digital system whose capacities to surveil and control are nearly unlimited, identity verification looks frightening indeed.

When it comes to China—which has been working on a retail CBDC since 2014, and in the past couple of years has rolled out trials of its own e-currency in more than 10 cities, with at least 261 million Chinese citizens using it—economists, international organizations, and the American press have had no trouble seeing the downside of government-issued digital tokens, with their inherent ability to surveil and record all transactions in real time. But what about America?

If a FedCoin became our official payment system, what you are allowed to pay for legally could be controlled and shifted on a day-by-day basis depending on what services or products the government wants to discourage or quash. This would have a reach far beyond just truckers protesting vaccine mandates.

Authorities could bake in faddish, top-down social goals that you—the sucker who merely wants to spend your money to meet your needs and desires—want nothing to do with. These could concern the environment (do you really need to buy that much carbon-generating stuff in a month?), safety (guns and gun accessories not FedCoin-compatible at this time) or “equity” (let’s make sure the right percentage of your spending goes to counterparties with the approved racial or gender mix).

Those who find such scenarios implausibly dystopian need only consider the credit card industry’s overnight decision in September 2022 to adopt a special new code for all gun purchases. Or the government pressure, without a legal demand challengeable in court, that certain mavericks be booted from major social networks, such as vaccine skeptic Alex Berenson. The current administration is clearly not afraid to use its powers to restrict our ability to use markets and services—and when it comes to money, the government palpably wants unconstrained law enforcement and monetary policy powers.

We have tools both legal (the Constitution) and technological (paper cash and peer-to-peer crypto) to help us curb or evade government overreach. But both could be overcome by a sufficiently motivated government.

“Protecting consumer privacy is critical,” the Fed’s January paper assured us. But it also said this: “Any CBDC would need to strike an appropriate balance…between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.” Guess who will be deciding on the appropriate balance?

The notion of shifting to a CBDC may seem unthinkably radical, but standard money usage can change surprisingly quickly. It took only around 10 years for the world to switch from the British pound to the U.S. dollar as its primary reserve currency. The U.S. government has proven itself willing to legally demonetize (and force you to exchange at rates it chose) things citizens had been saving and relying on for decades—see gold in the 1930s.

In a 2021 University of Chicago Law Review article, Gary B. Gorton of the Yale School of Management and Jeffery Zhang of the University of Michigan Law School laid out the issues at stake. “The question,” they wrote, is “whether policymakers would want to have central bank digital currencies coexist with stablecoins or to have central bank digital currencies be the only form of money in circulation….Congress has the legal authority to create a fiat currency and to tax competitors of that uniform national currency out of existence.”

The CBDC idea is very much on the Biden administration’s mind; as the White House Office of Science and Technology Policy wrote in its September contribution to the crypto policy initiative, Biden’s order “placed the highest urgency on research and development efforts into the potential design and deployment options of a U.S. CBDC.” The office announced “an interagency effort to develop a National Digital Assets Research and Development (R&D) Agenda” to “place a high priority on advancing research on topics like cryptography that could be helpful to CBDC experimentation and development at the Federal Reserve.”

Alarmingly, the Treasury Department’s “Action Plan” states that “the U.S. government has also been engaging through multilateral fora to establish principles for CBDCs and ensure that they…mitigat[e] illicit finance risks” and “comply with the global AML/CFT standards currently in place…any CBDC needs to integrate a commitment to mitigate its use in facilitating crime.” And once an obsession with making sure no one can use a currency to commit crime is a leading concern, there is almost no place the government has proven itself unwilling to go in hoovering up private information and preventing us from using our money in ways it disapproves of.

Powell told CNBC in April 2021 regarding a CBDC that “I think it’s more important to do this right than to do it fast.” Given that a government-run digital currency is a ready-made machine for the authorities to surveil, skim, manipulate, and control every single exchange of value we make, the only safe way to do it for American liberty is not to do it at all.

When a cryptocurrency exchange holding $16 billion worth of customer deposits suddenly collapses, what does that portend for the future of the crypto industry? How did Sam Bankman-Fried, the 30-year-old founder of the company and the number two donor to the Democratic party ahead of the recent midterms, win the trust and evade the careful scrutiny of so many venture capitalists, institutional investors, celebrities, and U.S. regulators for so long? Is heavy-handed regulation coming to the world of crypto?

Join Reason‘s Nick Gillespie and Zach Weissmueller this Thursday at 1 p.m. Eastern for a live discussion of these questions and more with special guest Jesse Powell, the co-founder and CEO of Kraken, one of the world’s largest cryptocurrency exchanges. Ask questions or leave comments ahead of or during the stream on the YouTube video above or at Reason‘s Facebook page here.

Photo credit: Tom Williams/CQ Roll Call/Newscom

What’s going on with FTX? The cryptocurrency exchange FTX has filed for bankruptcy amid revelations that it lent billions in customer assets to an affiliated trading firm called Alameda Research. Now its owner—a prominent Democratic donor and supporter of cryptocurrency regulation—is reportedly under criminal investigation.

Both FTX and Alameda Research were owned by Sam Bankman-Fried. Earlier this year, a Fortune magazine headline said he “has been called the next Warren Buffett.” But “now, Bankman-Fried looks, at best, like the original storyline for Michael Saylor of Microstrategy during the Dotcom bust. Or, more likely, like Elizabeth Holmes of Theranos infamy. Or, with increasing plausibility, like a less civic-minded Bernie Madoff,” writes Michael W. Green at Common Sense.

Bankman-Fried’s downfall is bad news for Democrats. He spent a reported $36 million on donations to Democrats this election season, making him “the second-largest donor to Democrats after George Soros,” according to the Financial Times.

What it means for cryptocurrency regulation is less clear. Bankman-Fried and FTX were major proponents of the proposed Digital Commodities Consumer Protection Act (DCCPA), which was introduced in the Senate in August and passed out of the Committee on Banking, Housing, and Urban Affairs in September. “The whole thing was being spearheaded by Sam and FTX, and their credibility has just been shredded,” Nic Carter, a general partner at Castle Island Ventures, told Fortune.

“While some hoped that legislation like the DCCPA would pass during the lame-duck session after Tuesday’s midterms, [Kristin Smith of the Blockchain Association] said that’s now unlikely, both because Bankman-Fried was a driving force and that policymakers may be more reluctant as they wait for the fallout,” Fortune reports.

But FTX’s implosion could ultimately serve as fodder for those who think cryptocurrency-related businesses need more oversight. “The recent events show the necessity of congressional action,” argued Rep. Patrick McHenry (R–N.C.), the top Republican on the House Financial Services Committee, in a statement. 

The downfall of FTX is at once simple and complicated.

The root cause seems to be simple: poor decisions—bordering on fraud—by Bankman-Fried. As a cryptocurrency exchange, FTX is supposed to hold people’s crypto assets and help them make trading transactions (a service for which it collects a fee). Instead, it lent billions of dollars in customer assets to Alameda Research, a scheme The Wall Street Journal described last week:

FTX Chief Executive Sam Bankman-Fried said in investor meetings this week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call, one of the people said.

All in all, FTX had $16 billion in customer assets, the people said, so FTX lent more than half of its customer funds to its sister company Alameda….

FTX paused customer withdrawals earlier this week after it was hit with roughly $5 billion worth of withdrawal requests on Sunday, according to a Thursday morning tweet from Mr. Bankman-Fried. The crisis forced FTX to scramble for an emergency investment.

FTX made a deal to sell to its rival Binance, but Binance backed out, saying the company’s problems were “beyond our control or ability to help.”

Now the U.S. Department of Justice, the Securities and Exchange Commission, and the Manhattan U.S. attorney’s office are reportedly investigating.

Whether or how Bankman-Fried broke the law is more complicated. Lending out customer funds without their consent “is generally forbidden in the regulated securities and derivatives markets,” notes the Journal, but the same rule doesn’t apply when it comes to cryptocurrency. Still, the move may be considered fraud or embezzlement. From the Journal:

“What this will boil down to is, were there deliberate lies to convince depositors or investors to part with their assets?” said Samson Enzer, a former Manhattan federal prosecutor. “Were there statements made that were false, and the maker of those statements knew they were false and made with the intent to deceive the investor?”

Prosecutors also could home in, the lawyers said, on statements Mr. Bankman-Fried made on Twitter last week, when he said FTX was “fine” and customer assets were safe—comments he later deleted.

Jurisdiction in this case is also complicated. FTX is based in the Bahamas, and was previously based in Hong Kong, though it did serve U.S. customers and have a U.S. affiliate.

The details of FTX’s bankruptcy are also complicated. “FTX is what’s known in the industry as a ‘free fall’ bankruptcy,” reports Bloomberg:

More than 130 related companies sought court protection at the end of last week without filing any of the usual court motions or explanatory documents seen in a big US insolvency case. Two days later, the companies’ main court docket contains only a 23-page fill-in-the-blank petition. In nearly every other multi-billion dollar Chapter 11 case in recent years, lawyers quickly file a smattering of routine requests designed to stabilize operations.

In a statement, the company’s new chief executive officer—a man who helped oversee the unwinding of Enron Corp.—told customers that details about the bankruptcy would hit the court docket “over the coming days.”

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ELECTION 2022

Democrats retain control of Senate. The victory of incumbent Sen. Catherine Cortez Masto in Nevada means Democrats will continue to control the U.S. Senate next year. Cortez Masto beat Republican Adam Laxalt in a very close race. That means Democrats now have 50 Senate seats and—with the vice president’s tie-breaking vote in play—a Senate majority, no matter what happens in Georgia, where Sen. Raphael Warnock (D–Ga.) and Republican challenger Herschel Walker are heading into a runoff vote.

Several elections for seats in the U.S. House of Representatives are still too close to call. “Republicans were closer to taking the House, having won 211 seats compared to Democrats’ 206, with 218 needed for a majority,” reports Reuters. “But the final outcome might not be known for days as officials continue counting ballots nearly a week after Americans went to the polls.”

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FREE MINDS

RIP Sharon Presley and Martin Morse Wooster. Two libertarian luminaries, Sharon Presley and Martin Morse Wooster, passed away recently. Both were contributors to Reason.

Wooster died on November 12 after being struck by a car in a hit-and-run in Williamsburg, Virginia. He was a senior fellow at the Capital Research Center, a journalist, and the author of several books, including Angry Classrooms, Vacant Minds; The Great Philanthropists and the Problem of “Donor Intent”; and Great Philanthropic Mistakes. For a while he served as Reason‘s Washington editor. You can find his extensive Reason archive here.

Presley died on October 31 after a long struggle with various health issues. A longtime libertarian activist, she was the founder of Laissez Faire Books, the founder and executive director of the Association of Libertarian Feminists, and the author or editor of several books, including Exquisite Rebel: The Essays of Voltairine de CleyreYou can find her Reason archive here.

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FREE MARKETS

A preview of Scott Lincicome’s new book on how free markets can help American workers:

?NEW TODAY?: The first 8 chapters of the forthcoming @CatoInstitutue book, Empowering the New American Worker: Market-Based Solutions for Today’s Workforce https://t.co/DiiSKXnlFz #NewWorker

Thread? on the book’s motivation, content, & objectives: /1 pic.twitter.com/XZE6iWFJ0A

— Scott Lincicome (@scottlincicome) November 10, 2022

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QUICK HITS

If you’re suffering from a case of the Mondays, at least you (probably) don’t work for an institution that seeks to sentence (or allows people to be sentenced) on the basis of acquitted conduct. So you got that going for you, which is nice.https://t.co/ECROSTdDQR pic.twitter.com/CeOS8awxYo

— Clark Neily (@ConLawWarrior) November 14, 2022

• “Every election denier who sought to become the top election official in a critical battleground state lost at the polls this year, as voters roundly rejected extreme partisans who promised to restrict voting and overhaul the electoral process,” reports The New York Times.

• Arizona Republican Kari Lake looks like she’s losing the Arizona’s governor race.

Lake’s the only one of the full-MAGA conspiracy candidates with some charisma, strong pre-existing ties to the state’s voters AND an opponent who’s been widely criticized for a poor campaign. If she’s not getting over the hump, the damage from the brand is pretty undeniable.

— Benjy Sarlin (@BenjySarlin) November 14, 2022

• There’s no good reason to expand the government-funded school lunch program, argues Baylen Linnekin.

• “Donald Trump’s attorneys filed a lawsuit seeking to block the House January 6 select committee’s subpoena demanding testimony in the investigation into Capitol attack,” reports The Guardian.

• A potted plant could beat a Trump Republican these days, writes J.D. Tuccille.

• Nataša Pirc Musar, a lawyer who has represented Melania Trump, has become the first female president of Slovenia.

• New York Republican George Santos has won a seat in the U.S. House. Santos is the first openly gay non-incumbent Republican to be elected to Congress:

George Santos appears poised to make history as the 1st openly gay Republican non-incumbent elected to Congress. Previous openly gay Republican congressmen were outed or came out after being elected the for the 1st time. No out LGBTQ Republican has served in Congress since 2007. pic.twitter.com/SVcWvm626M

— Benjamin Ryan (@benryanwriter) November 9, 2022